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Growth Opportunities, Technology Shocks, and Asset Prices

  • Leonid Kogan
  • Dimitris Papanikolaou

We explore the impact of investment-specific technology (IST) shocks on the crosssection of stock returns. IST shocks reflect technological advances embodied in new capital goods. Using a structural model, we show that IST shocks have a differential effect on the two fundamental components of firm value, the value of assets in place and the value of growth opportunities. This differential sensitivity to IST shocks has two main implications. First, risk premia on firms with abundant growth opportunities are different from those on firms with limited growth opportunities. Second, firms with similar levels of growth opportunities comove with each other, giving rise to the value factor in stock returns. Our model replicates the failure of the conditional CAPM to capture the value premium. Our empirical tests confirm the model's predictions for asset returns and investment rates.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17795.

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Date of creation: Jan 2012
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Publication status: published as Kogan, L., D. Papanikolaou, 2014, “Growth Opportunities, Technology Shocks, and Asset Prices.” Journal of Finance, 69, 675-718.
Handle: RePEc:nbr:nberwo:17795
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