Investment Shocks and Cross-sectional Returns: An Investment-based Approach

Speaker: 宋忠智, CKGSB 长江商学院

Topic:	Investment Shocks and Cross-sectional Returns: An Investment-based Approach
Date:	May 12, 2017
Venue:	Room 502, Daoyuan Building, CUHK(SZ)
Speaker:	宋忠智 CKGSB 长江商学院
Detail/Abstract:	We propose a new measure of firms' exposure to investment shocks-i.e., shocks that affect firms' cost of investment-and study its implication for cross-sectional returns. Theoretically, we show that a firm's exposure to investment shocks is determined by its discounted future investment expenditures scaled by its current market value. Unlike existing measures, which rely on noisy proxies of investment shocks, ours can be computed directly from observable investment data. Empirically, we find that across book-to-market portfolios, our investment-based measure of risk exposure to investment shocks has the opposite pattern to that of existing proxy-based measures. This finding has profound implications for the pricing effect of investment shocks. According to our measure, value firms have a higher (as opposed to lower) exposure to investment shocks suggesting that a positive (as opposed to negative) price of risk for investment shocks is required to explain the value premium.