Growth Opportunities, Technology Shocks, and Asset Prices
The Journal of Finance2013Vol. 69(2), pp. 675–718
Citations Over TimeTop 1% of 2013 papers
Abstract
ABSTRACT We explore the impact of investment‐specific technology (IST) shocks on the cross section of stock returns. Using a structural model, we show that IST shocks have a differential effect on the value of assets in place and the value of growth opportunities. This differential sensitivity to IST shocks has two main implications. First, firm risk premia depend on the contribution of growth opportunities to firm value. Second, firms with similar levels of growth opportunities comove with each other, giving rise to the value factor in stock returns and the failure of the conditional CAPM. Our empirical tests confirm the model's predictions.
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