Please use this identifier to cite or link to this item:
PIRA download icon_1.1View/Download Full Text
DC FieldValueLanguage
dc.contributorSchool of Accounting and Financeen_US
dc.creatorChue, TKen_US
dc.creatorXu, Jen_US
dc.rightsPosted with permission of the author.en_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
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
dc.relation.conferenceChina International Conference in Financeen_US
dc.description.validate202106 bcrcen_US
dc.description.oaOther Versionen_US
Appears in Collections:Conference Paper
Files in This Item:
File Description SizeFormat 
Chue_Xu_ProfitInvStockRet_May2018 (v27) Blind.pdf1.71 MBAdobe PDFView/Open
Open Access Information
Status open access
File Version Other Version
Show simple item record

Page views

Citations as of Jun 26, 2022


Citations as of Jun 26, 2022

Google ScholarTM


Items in DSpace are protected by copyright, with all rights reserved, unless otherwise indicated.