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, Revised in April 2018
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth

We confront the one-factor production-based asset pricing model with the evidence on firm-level investment, to uncover that it produces implications for the dynamics of capital that are seriously at odds with the evidence. The data shows that, upon being hit by adverse profitability shocks, large public firms have ample latitude to divest their least productive assets and downsize. In turn, this reduces the risk faced by their shareholders and the returns that they are likely to demand. It follows that when the frictions to capital adjustment are shaped to respect the evidence on investment, the model–generated cross–sectional dispersion of returns is only a small fraction of what documented in the data. Our conclusions hold true even when either operating or labor leverage are modeled in ways that were shown to be promising in the extant literature.

download in pdf format
   (421 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