Working Paper: NBER ID: w24709
Authors: Kewei Hou; Haitao Mo; Chen Xue; Lu Zhang
Abstract: In a multiperiod investment framework, firms with high expected growth earn higher expected returns than firms with low expected growth, holding investment and expected profitability constant. This paper forms cross-sectional growth forecasts, and constructs an expected growth factor that yields an average premium of 0.82% per month (t = 9.81). The q5-model, which augments the Hou-Xue-Zhang (2015) q-factor model with the new factor, shows strong explanatory power in the cross section, and outperforms other recently proposed factor models such as the Fama-French (2018) six-factor model.
Keywords: Expected Growth; Asset Pricing; Investment Growth
JEL Codes: G12; G14; G31; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High Expected Investment Growth (G31) | Expected Returns (G17) |
| Cash Flows (G19) | Investment-to-Assets Changes (G31) |
| Change in Return on Equity (G32) | Investment-to-Assets Changes (G31) |
| Expected Growth Factor (O40) | Asset Returns (G19) |
| Q5 Model (C52) | Asset Pricing and Investment Dynamics (G19) |