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What Moves Investment Growth?

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  • LONG CHEN
  • ZHI DA
  • BORJA LARRAIN

Abstract

We use accounting identities to decompose unexpected changes in investment growth into surprises to current cash‐flow growth and stock returns, and revisions of expectations about future cash‐flow growth and future discount rates. Using a vector autoregressive model we find that current cash‐flow surprises account for the largest element of the variance decomposition. Investment growth and current cash‐flow surprises are negatively correlated with news about future cash‐flow growth, which can be expected from persistent productivity shocks and decreasing returns to scale. We find little evidence of a discount rate channel for investment since return terms are small and have unintuitive signs.

Suggested Citation

  • Long Chen & Zhi Da & Borja Larrain, 2016. "What Moves Investment Growth?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(8), pages 1613-1653, December.
    • Handle: RePEc:wly:jmoncb:v:48:y:2016:i:8:p:1613-1653
    DOI: 10.1111/jmcb.12360
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