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Growth Opportunities, Technology Shocks, and Asset Prices
Author(s) -
KOGAN LEONID,
PAPANIKOLAOU DIMITRIS
Publication year - 2014
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12136
Subject(s) - value premium , economics , capital asset pricing model , growth stock , stock (firearms) , differential (mechanical device) , risk premium , value (mathematics) , econometrics , monetary economics , investment (military) , financial economics , stock market , restricted stock , mechanical engineering , paleontology , horse , machine learning , politics , computer science , law , political science , engineering , biology , aerospace engineering
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.