Abstract
We ask to what extent the negative relation between investment and average stock returns is driven by risk. We show that: (i) the average return spread between low and high asset growth and investment portfolios is largely accounted for by their spread in systematic risk, as measured by the loadings on the Chen, Roll, and Ross (1986) factors; (ii) as predicted by q-theory and real options models, systematic risk falls during large investment periods; (iii) the returns of factors formed on the investment-to-assets, asset growth, and investment growth all forecast aggregate economic activities. Our evidence suggests that risk plays an important role in explaining the investment-return relation.
Original language | American English |
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Pages (from-to) | 182-205 |
Number of pages | 24 |
Journal | Journal of Financial Economics |
Volume | 101 |
Issue number | 1 |
DOIs | |
State | Published - Jul 2011 |
Externally published | Yes |
Keywords
- Expected returns
- Q-theory
- Real investment
- Real options
- Systematic risk
All Science Journal Classification (ASJC) codes
- Accounting
- Finance
- Economics and Econometrics
- Strategy and Management