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Conditional Equity Premium and Aggregate Corporate Investment

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  • HUI GUO
  • BUHUI QIU

Abstract

We document a strong negative relation between aggregate corporate investment and conditional equity premium estimated from direct stock market risk measures. Consistent with the investment‐based asset pricing model, the comovement with conditional equity premium fully accounts for aggregate investment's market return predictive power. Similarly, conditional equity premium is a significant determinant of classic Tobin's q measure, although q has much weaker explanatory power for aggregate investment possibly because of its measurement errors. Moreover, the positive relation between aggregate investment and investor sentiment documented in previous studies reflects the fact that both variables correlate closely with conditional equity premium.

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  • Hui Guo & Buhui Qiu, 2023. "Conditional Equity Premium and Aggregate Corporate Investment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(1), pages 251-295, February.
    • Handle: RePEc:wly:jmoncb:v:55:y:2023:i:1:p:251-295
    DOI: 10.1111/jmcb.12910
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