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Firm Characteristics and Stock Returns: The Role of Investment-Specific Shocks, Review of Financial Studies

Abstract

Average return differences among firms sorted on valuation ratios, past investment, profitability, market beta, or idiosyncratic volatility are largely driven by differences in exposures of firms to the same systematic factor related to embodied technology shocks. Using a calibrated structural model, we show that these firm characteristics are correlated with the ratio of growth opportunities to firm value, which affects firms' exposures to capital-embodied productivity shocks and risk premia. We thus provide a unified explanation for several apparent anomalies in the cross-section of stock returnsnamely, predictability of returns by these firm characteristics and return comovement among firms with similar characteristics.

Type

Article

Author(s)

Leonid Kogan, Dimitris Papanikolaou

Date Published

2013

Citations

Kogan, Leonid, and Dimitris Papanikolaou. 2013. Firm Characteristics and Stock Returns: The Role of Investment-Specific Shocks. Review of Financial Studies. 26(11)

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