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Investment Shocks and Asset Prices: An Investment-Based Approach

Published online by Cambridge University Press:  04 October 2019

Lorenzo Garlappi*
Affiliation:
Garlappi, [email protected], University of British Columbia Sauder School of Business
Zhongzhi Song
Affiliation:
Song, [email protected], Cheung Kong Graduate School of Business
*
Garlappi (corresponding author), [email protected]

Abstract

We propose a new approach, based on investment data, to determine firms’ return exposure to investment-specific technology (IST) shocks. When applied to U.S. data, we find that, in contrast to the pattern estimated from empirical IST proxies, value firms have higher exposure to IST shocks than growth firms. When applied to simulated data from existing theoretical models, our approach reveals that existing empirical findings may result from measurement errors in the IST proxies. Importantly, our simulation analysis uncovers the key role played by investment data in determining the economic mechanism through which IST shocks affect cross-sectional asset prices.

Type
Research Article
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We thank an anonymous referee, Hendrik Bessembinder (the editor), Jack Favilukis, Vito Gala, João Gomes, Alessandro Graniero, Haibo Jiang, Jiri Knesl, Jun Li, Erik Loualiche, Georgios Skoulakis, Amir Yaron, and Harold Zhang; seminar participants at Boston University, Cheung Kong Graduate School of Business, Central University of Finance and Economics, the Chinese University of Hong Kong (Shenzhen), Fudan University, Renmin University of China, the University of Arizona, the University of British Columbia, and the University of Pennsylvania (Wharton); and conference participants at the 2016 China International Conference in Finance, the 2016 Summer Institute of Finance, the Society for Financial Studies (SFS) Cavalcade North America 2018, and the 2019 BI Norwegian Business School–Swedish House of Finance (BI-SHoF) Conference for valuable comments and discussions. We are especially grateful to Ryan Israelsen for sharing with us the quality-adjusted equipment price series.

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