Profitability, asset investment, and aggregate stock returns

Timothy K. Chue and Jin Karen Xu

Journal of Banking & Finance, 2022, vol. 143, issue C

Abstract: We find that aggregate profitability and asset investment exhibit robust joint predictive power for aggregate excess stock returns, consistent with the investment model of Hou, Xue, and Zhang (henceforth HXZ, 2015). These results provide out-of-sample empirical support for HXZ, as the same mechanisms that HXZ use to explain firm-specific variation in stock returns can also be used to explain variation that is market-wide in nature. Also consistent with the HXZ investment model, we find that the growth rate of short-term (long-term) assets exhibits a stronger predictive power for one-year-ahead (two-year-ahead) stock returns.

Keywords: Profitability; Asset growth; Discount rates; Aggregate stock return forecasts (search for similar items in EconPapers)
JEL-codes: G12 G17 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:143:y:2022:i:c:s0378426622001935

DOI: 10.1016/j.jbankfin.2022.106597

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