The Q-Theoretical Link Between Stock and Investment Returns

Investment-based asset pricing uses the link between stock and investment returns to tie expected returns with firm characteristics. I derive the equivalence between these two returns in the Q-framework with variable capacity utilization, proportional operating costs, irreversible investment, and dividend constraints. With multiple capital goods, stock return is the value-weighted average of individual investment returns. Under time-to-build, I derive the relation between the market value and the marginal q, but no analytical link is available between stock and investment returns. William E. Simon Graduate School of Business Administration, University of Rochester, Rochester NY, 14627. Tel: (585)275-3491, fax: (585)273-1140, email: [email protected]. I thank Clara Vega for helpful discussions.