Lumpy investment and expected stock returns
2020
Im, Hyun Joong | Park, Heungju
This study investigates the predictability of stock market returns using a novel corporate investment measure that captures the lumpiness of firm-level investment. We find that the proportion of firms with investment spikes (spike) is a strong predictor of excess stock returns. Specifically, an increase in spike significantly lowers future excess stock returns. The predictive ability of spike is consistently observed in both in-sample and out-of-sample tests. Furthermore, spike shows strong predictive ability at the business cycle frequency, suggesting that its predictive ability is driven by the time-varying risk premium associated with business cycles rather than temporary mispricing.
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