Lumpy investment and expected stock returns

Hyun Joong Im and Heungju Park

Economics Letters, 2020, vol. 193, issue C

Abstract: This study investigates the predictability of stock market returns using a novel corporate investment measure that captures the lumpiness of firm-level investment. We find that the proportion of firms with investment spikes (spike) is a strong predictor of excess stock returns. Specifically, an increase in spike significantly lowers future excess stock returns. The predictive ability of spike is consistently observed in both in-sample and out-of-sample tests. Furthermore, spike shows strong predictive ability at the business cycle frequency, suggesting that its predictive ability is driven by the time-varying risk premium associated with business cycles rather than temporary mispricing.

Keywords: Lumpy investment; Investment spike; Stock return predictability; Time-varying risk premium (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:193:y:2020:i:c:s0165176520301798

DOI: 10.1016/j.econlet.2020.109263

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