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The expected investment growth premium

Author

Listed:
  • Jun Li
  • Huijun Wang
  • Jianfeng Yu

Abstract

We propose a novel measure of investment plans, namely expected investment growth (EIG), and find stocks with high EIG outperform stocks with low EIG by 17% per annum. This premium can be generated in a neoclassical model with the investment plan friction, in which a firm's expected returns increases with its planned investment due to an embedded leverage effect. We provide empirical evidence on the interaction of the cash flow effect and discount rate effect in driving this EIG premium. Our findings highlight the investment plan friction as an important economic channel to understand the cross‐sectional risk premium.

Suggested Citation

  • Jun Li & Huijun Wang & Jianfeng Yu, 2021. "The expected investment growth premium," Financial Management, Financial Management Association International, vol. 50(4), pages 905-933, December.
    • Handle: RePEc:bla:finmgt:v:50:y:2021:i:4:p:905-933
    DOI: 10.1111/fima.12340
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    References listed on IDEAS

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