Ross School of Business
University of Michigan
701 Tappan Ave.
Ann Arbor, MI 48109
NBER Program Affiliations:
NBER Affiliation: Research Associate
Institutional Affiliation: University of Michigan
Information about this author at RePEc
NBER Working Papers and Publications
with Laura X. L. Liu, Lu Zhang: w13024
The neoclassical q-theory is a good start to understand the cross section of returns. Under constant return to scale, stock returns equal levered investment returns that are tied directly with characteristics. This equation generates the relations of average returns with book-to-market, investment, and earnings surprises. We estimate the model by minimizing the differences between average stock returns and average levered investment returns via GMM. Our model captures well the average returns of portfolios sorted on capital investment and on size and book-to-market, including the small-stock value premium. Our model is also partially successful in capturing the post-earnings-announcement drift and its higher magnitude in small firms.
|January 1995||The Effect of Uncertainty on Investment: Some Stylized Facts|
with John V. Leahy: w4986
The theoretical relationship between investment and uncertainty is ambiguous. This paper briefly surveys the insights that theory has to offer and then runs a series of simple tests aimed at evaluating the empirical significance of various theoretical effects. Our results from a panel of U.S. manufacturing firms indicate a negative effect of uncertainty on investment consistent with theories of irreversible investment. We find no evidence for a positive effect via the channel of the convexity of the marginal product of capital, and we find no evidence for the presence of a CAPM-based effect of risk.
Published: Journal of Money Credit and Banking, Vol. 28, no. 1, (February 1996), pp. 64-83. citation courtesy of
|June 1993||Internal Finance and Firm Investment|
with R. Glenn Hubbard, Anil K. Kashyap: w4392
We examine the neoclassical investment model using a panel of U.S. manufacturing firms. The standard model with no financing constraints cannot be rejected for firms with high (pre-sample) dividend payouts. However, it is decisively rejected for firms with low (pre-sample) payouts (firms we expect to face financing constraints). Hem, investment is sensitive to both firm cash flow and macroeconomic credit conditions, holding constant investment opportunities. Sample splits based on firm size or maturity do not produce such distinctions. The latter comparison identifies firms where "free-cash-flow" problems might be expected to produce correlations between investment and cash flow.
Published: Journal of Money, Credit and Banking, vol. 27, no. 3, pp. 683-701, August 1995.