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Endogenous technological progress and the cross section of stock returns

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Lin, Xiaoji

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Abstract

I study the cross sectional variation of stock returns and technological progress using a dynamic equilibrium model with production. In the model, technological progress is endogenously driven by R&D investment and is composed of two parts. One part is product innovation devoted to creating new products; the other part is dedicated to increasing the productivity of physical investment and is embodied in new tangible capital (e.g., structures and equipment). The model breaks the symmetry assumed in standard models between intangible capital and tangible capital, in which the accumulation processes of tangible capital stock and intangible capital stock do not affect each other. The model explains qualitatively and in many cases quantitatively well-documented empirical regularities: (i) the positive relation between R&D investment and the average stock returns; (ii) the negative relation between physical investment and the average stock returns; and (iii) the positive relation between book-to-market ratio and the average stock returns.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14829.

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Date of creation: 15 Jan 2009
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Handle: RePEc:pra:mprapa:14829

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Related research
Keywords: Technological Progress; R&D Investment; Physical Investment; Stock Return;

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Find related papers by JEL classification:
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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  1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June. [Downloadable!] (restricted)
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  3. Tuomo Vuolteenaho, 2001. "What Drives Firm-Level Stock Returns?," NBER Working Papers 8240, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Christopher A. Hennessy & Toni M. Whited, 2005. "Debt Dynamics," Journal of Finance, American Finance Association, vol. 60(3), pages 1129-1165, 06. [Downloadable!] (restricted)
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  5. Lu Zhang, 2005. "The Value Premium," Journal of Finance, American Finance Association, vol. 60(1), pages 67-103, 02. [Downloadable!] (restricted)
  6. Owen Lamont, . "Investment Plans and Stock Returns."," CRSP working papers 488, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  7. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October. [Downloadable!] (restricted)
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  8. Jonas D. M. Fisher, 2006. "The Dynamic Effects of Neutral and Investment-Specific Technology Shocks," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 413-451, June. [Downloadable!] (restricted)
  9. Louis K. C. Chan, 2001. "The Stock Market Valuation of Research and Development Expenditures," Journal of Finance, American Finance Association, vol. 56(6), pages 2431-2456, December. [Downloadable!] (restricted)
  10. Titman, Sheridan & Wei, K. C. John & Xie, Feixue, 2004. "Capital Investments and Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(04), pages 677-700, December. [Downloadable!]
  11. Cohen, Wesley M & Klepper, Steven, 1996. "Firm Size and the Nature of Innovation within Industries: The Case of Process and Product R&D," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 232-43, May. [Downloadable!] (restricted)
  12. Owen A. Lamont, 2000. "Investment Plans and Stock Returns," Journal of Finance, American Finance Association, vol. 55(6), pages 2719-2745, December. [Downloadable!] (restricted)
  13. Greenwood, J. & Jovanovic, B., 1999. "The IT Revolution and the Stock Market," RCER Working Papers 460, University of Rochester - Center for Economic Research (RCER). [Downloadable!]
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  14. Ilan Cooper, 2006. "Asset Pricing Implications of Nonconvex Adjustment Costs and Irreversibility of Investment," Journal of Finance, American Finance Association, vol. 61(1), pages 139-170, 02. [Downloadable!] (restricted)
  15. King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007 Elsevier. [Downloadable!] (restricted)
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