Growth Opportunities, Technology Shocks and Asset Prices, Journal of Finance
We explore the impact of investment-specific technology (IST) shocks on the crosssection of stock returns and firms' investment using a production-based asset pricing model. The key property of our model is that the present value of growth opportunities has higher beta with respect to IST shocks than the value of assets in place, which leads to three main implications. First, firms with a higher fraction of growth opportunities in the firm value (high-growth firms) exhibit risk premia different from those of firms with fewer growth opportunities (low-growth firms). Second, high-growth firms co-move with each other, giving rise to a systematic factor in stock returns distinct from the market portfolio and related to the value factor. Third, stock return betas with respect to the IST shocks reveal cross-sectional heterogeneity in firms' growth opportunities. We find empirical support for qualitative predictions of the model. We calibrate our model and show that its main predictions for investment dynamics, cash flows and expected returns are quantitatively consistent with the data.
Leonid Kogan, Dimitris Papanikolaou
Kogan, Leonid, and Dimitris Papanikolaou. 2014. Growth Opportunities, Technology Shocks and Asset Prices. Journal of Finance. 69(2)