NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Investment and The Cross-Section of Equity Returns

Gian Luca Clementi, Berardino Palazzo

NBER Working Paper No. 21064
Issued in April 2015
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth

When the neoclassical model of investment is serious about investment, it fails to replicate elementary cross-sectional features of equity returns. Without leverage, the model produces a value discount - i.e. value firms earn lower returns than growth firms. With large enough operating leverage, a value premium emerges, but its magnitude is always smaller than the size premium's. Furthermore, when parameters are set to match key moments of the cross--sectional distribution of investment and the average book-to-market ratio, the value premium is minuscule -- about one order of magnitude smaller than found in the data. This result holds true for different specifications of the stochastic discount factor and does not depend upon the magnitude of capital adjustment costs

download in pdf format
   (404 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w21064

Users who downloaded this paper also downloaded* these:
McCaig, McMillan, Verduzco-Gallo, and Jefferis w21029 Stuck in the Middle? Structural Change and Productivity Growth in Botswana
Bianchi w21056 Rare Events, Financial Crises, and the Cross-Section of Asset Returns
Jayachandran and Pande w21036 Why Are Indian Children So Short?
Bai, Hou, Kung, and Zhang w21016 The CAPM Strikes Back? An Investment Model with Disasters
Rauch w21067 Dynastic Entrepreneurship, Entry, and Non-Compete Enforcement
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us