Capital Heterogeneity, Time-To-Build, and Return Predictability

Research output: Conference Papers (RGC: 31A, 31B, 32, 33)33_Other conference paper

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Author(s)

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Detail(s)

Original languageEnglish
Publication statusPresented - 10 Jul 2019

Conference

TitleChina International Conference in Finance 2019
PlaceChina
CityGuangzhou
Period9 - 12 July 2019

Abstract

I study how the two major types of business investment, equipment investment and structures investment, are differently linked to stock returns. I empirically show that equipment investment has a significantly stronger predictive power for stock returns than structures investment, both in-sample and out-of-sample, using US aggregate-, US asset-, US industry-, and UK aggregate-level data. To explain this empirical finding, I build a general equilibrium production model in which it takes a shorter time-to-build for equipment investment than for structures investment to transform into productive capital. In the model, equipment investment reacts to productivity shocks in a more timely manner, and thus it reflects more of the information contained in stock prices. In addition, the model provides theoretical support for previous empirical findings of return predictability uncovered from planned investment.

Research Area(s)

  • Equipment Investment, Structures Investment, Time-To-Build, Stock Return Predictability, Production-Based Asset Pricing

Citation Format(s)

Capital Heterogeneity, Time-To-Build, and Return Predictability. / Luo, Ding.

2019. China International Conference in Finance 2019, Guangzhou, China.

Research output: Conference Papers (RGC: 31A, 31B, 32, 33)33_Other conference paper