Working Paper: NBER ID: w17795
Authors: Leonid Kogan; Dimitris Papanikolaou
Abstract: We explore the impact of investment-specific technology (IST) shocks on the crosssection of stock returns. IST shocks reflect technological advances embodied in new capital goods. Using a structural model, we show that IST shocks have a differential effect on the two fundamental components of firm value, the value of assets in place and the value of growth opportunities. This differential sensitivity to IST shocks has two main implications. First, risk premia on firms with abundant growth opportunities are different from those on firms with limited growth opportunities. Second, firms with similar levels of growth opportunities comove with each other, giving rise to the value factor in stock returns. Our model replicates the failure of the conditional CAPM to capture the value premium. Our empirical tests confirm the model's predictions for asset returns and investment rates.
Keywords: investment-specific technology shocks; cross-section of stock returns; risk premia; firm value; growth opportunities
JEL Codes: E22; E32; G12; O3; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| IST shocks (L86) | firm value (G32) |
| IST shocks (L86) | value of assets in place (G31) |
| IST shocks (L86) | value of growth opportunities (D25) |
| value of growth opportunities (D25) | firm value (G32) |
| positive IST shock (F44) | market value increase for firms with abundant growth opportunities (D25) |
| positive IST shock (F44) | investment increase for firms with higher IST betas (G31) |
| cross-sectional differences in IST risk exposures (D91) | differences in growth opportunities (O49) |