Corporate Investment and Asset Price Dynamics: Implications for the Cross-Section of Returns

Adlai Fisher, Murray Carlson

Research

37 Pages

The authors examine how corporate investment decisions help explain differences in stock returns. They link the value premium to fixed operating costs and the size premium to limited growth opportunities, showing how changing business conditions can alter risk even when underlying revenue risk stays constant.

Key Takeaways

Size Premium: The smallest stock portfolio averaged monthly excess returns of 0.994%, compared with 0.442% for the largest.
Value Premium: The highest book to market portfolio averaged monthly excess returns of 1.381%, versus 0.259% for the lowest.
Model Limitations: Simulated monthly volatility for the smallest stock portfolio reached 37.35%, compared with 6.75% in actual data.
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