Please use this identifier to cite or link to this item: http://hdl.handle.net/10397/90254
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dc.contributorSchool of Accounting and Financeen_US
dc.creatorChue, TKen_US
dc.creatorXu, Jen_US
dc.date.accessioned2021-06-01T03:22:25Z-
dc.date.available2021-06-01T03:22:25Z-
dc.identifier.urihttp://hdl.handle.net/10397/90254-
dc.language.isoenen_US
dc.rightsPosted with permission of the author.en_US
dc.subjectProfitabilityen_US
dc.subjectAsset growthen_US
dc.subjectBook-to-market ratioen_US
dc.subjectEquity premium forecastsen_US
dc.titleProfitability, asset investment, and aggregate stock returnsen_US
dc.typeConference Paperen_US
dc.identifier.spage1en_US
dc.identifier.epage75en_US
dcterms.abstractThe book-to-market ratio (B/M), profitability, and asset investment exhibit robust joint predictive power for the equity premium, generating out-of-sample R2s of 7%, 20%, and 29%, respectively, in one-quarter-, one-year-, and two-year-ahead forecasts. Since profitability and investment are positively correlated with each other yet predict future returns in opposite directions, while B/M and profitability are negatively correlated with each other yet predict future returns in the same direction, the variables’ joint predictive power is much higher than the sum of their standalone counterparts. Just as Fama and French (2006, 2015, 2016) and Hou, Xue, and Zhang (2014, 2015, 2017) show that profitable firms who invest conservatively are associated with high future alphas in the cross section, we find that high aggregate profits and low asset growth precede high aggregate stock returns in the time series. We also find that short-term (long-term) asset growth predicts one-year-ahead (two-year-ahead) stock returns—consistent with firms’ investment decisions being more responsive to changes in discount rates that correspond to the investment’s time horizon. To explain this pattern from a behavioral perspective requires two types of sentiment—one that primarily influences short-term investment and another that affects long-term investment only.en_US
dcterms.accessRightsopen accessen_US
dcterms.bibliographicCitationPaper presentation at 2018 China International Conference in Finance July 10-13, 2018, TianJin, China, p. 1-75en_US
dcterms.issued2018-
dc.relation.conferenceChina International Conference in Financeen_US
dc.description.validate202106 bcrcen_US
dc.description.oaOther Versionen_US
dc.identifier.FolderNumbera0782-n04en_US
dc.identifier.SubFormID1685-
dc.description.fundingSourceRGCen_US
dc.description.fundingText15501515en_US
dc.description.pubStatusnullen_US
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