Asset Growth, Profitability, and Investment Opportunities

Growth Opportunities, Technology Shocks, and Asset Prices

We explore the impact of investment-specific technology (IST) shocks on the crosssection of stock returns. IST shocks reflect technological advances embodied in new capital goods. Using a structural model, we show that IST shocks have a differential effect on the two fundamental components of firm value, the value of assets in place and the value of growth opportunities. This differential sensi...

International Asset Allocation with Time-Varying Investment Opportunities

What is Behind the Asset Growth and Investment Growth Anomalies?

Existing studies show that firm asset and investment growth predict cross-sectional stock returns. Firms that shrink their assets or investments subsequently earn higher returns than firms that expand their assets or investments. I show that the superior returns of the low asset and investment growth portfolios are due to the omission of delisting returns in CRSP monthly stock return file and t...

Profitability, investment, and efficiency wages

We examine a model that blends the neoclassical theory of investment with an intertemporal efficiency wage model with turnover costs. Investment decisions in capital are associated with the allocation of labor and the determination of efficiency wages. The model relates Tobin’s q to efficiency wages and, in particular, to the Solow condition. It provides a general framework to analyze firm’s in...

Investment Functions and the Profitability Gap

We examine a variety of fixed asset investment theory approaches and show that, despite apparent differences, all contain a common ‘gene’ – the profitability gap. This finding is equally applicable to the paradigms of neoclassical general equilibrium in logical time and post-classical fullyadjusted stationary and steady states in historical time. The generic investment function and its characte...