Irreversible Investment and the Cross-Section of Stock Returns in General Equilibrium

A general equilibrium production economy with heterogeneous firms and irreversible investment generates the value premium. Investment irreversibility prevents unprofitable value firms from optimally scaling down their capital stock. In contrast, profitable and fast growing - growth - firms can optimally use investment to provide consumption insurance. Value firms are riskier and have higher expected returns than growth firms, especially in bad times when consumption volatility is high. The value premium is larger for small stocks as small value firms are more severely affected by irreversibility. Firms’ investment and capital predict the cross-section of stock returns much like book-to-market and market equity both in the model and data. The model can replicate the failure of the unconditional CAPM. Multifactor models, including the Fama and French (1993) factor model, and to a lesser extent, conditional versions of the CAPM, outperform the unconditional CAPM

Measuring Marginal q

Using asset prices I estimate the marginal value of capital in a dynamic stochastic economy under general assumptions about technology and preferences. The state-space measure of marginal q relies on the joint measurability of the value function, i.e. firm market value, and its underlying firm state variables. Unlike existing methodologies, the state-space marginal q requires only general restrictions on the stochastic discount factor and the firm investment technology, and it uses simple linear estimation methods. Consistently with a large class of neoclassical investment models, I construct the state-space marginal q using the firm capital stock and profitability shocks. I show that this new measure of real investment opportunities is substantially different from the conventional Tobin\u27s Q, it yields more plausible and robust estimates of capital adjustment costs, it increases the correlation with investment and the sensitivity of investment to fundamentals

The Distribution of Firm Size and Aggregate Investment

We investigate empirically how the distributional dynamics of firm investment rates and firm size affect aggregate US investment during the period 1962-2006. We find that the cross-sectional covariation between firms’ investment rates and their relative size accounts on average for about half of aggregate investment rate. The negative sign of this covariance implies that a mean-preserving increase in the cross-sectional dispersion of investment rates and/or relative size reduces aggregate investment rate. We investigate the implications of firm-level conditional convergence in corporate investment rates on the dynamics of aggregate investment. We identify the cross-sectional variance of firm relative size as being particularly relevant to explain aggregate investment dynamics. With aggregate NIPA investment data, the cross-sectional variance of firm size fits the investment equation better than the traditional measure of Tobin’s Q and it drives out cash flow

Public Information and Inefficient Investment

In a general equilibrium economy with uninsurable aggregate liquidity shocks, we show that public information may trigger allocative inefficiency and liquidity crises. Entrepreneurs do not internalize the negative impact of their investment decisions on the equilibrium risk of liquidity shortage. A more informative public signal decreases the risk of a liquidity shock, but increases the risk of capital rationing conditional on a liquidity shock. In equilibrium, information quality has a non-monotonic effect on expected returns on investment and social welfare. An increase in the quality of public information has redistributive effects on welfare as entrepreneurs gain and financiers lose. Investment restrictions and targeted disclosure of information achieve constrained efficiency as competitive market equilibrium

Government Spending, Political Cycles, and the Cross Section of Stock Returns

Using a novel measure of industry exposure to government spending, we show predictable variation in cash flows and stock returns over political cycles. During Democratic presidencies, firms with high government exposure experience higher cash flows and stock returns, while the opposite pattern holds true during Republican presidencies. Business cycles, firm characteristics, and standard risk factors do not account for the pattern in returns across presidencies. An investment strategy that exploits the presidential cycle predictability generates abnormal returns as large as 6.9% per annum. Our results suggest market underreaction to predictable variation in the effect of government spending policies

Meta-analysis of genome-wide association studies of asthma in ethnically diverse North American populations.

Asthma is a common disease with a complex risk architecture including both genetic and environmental factors. We performed a meta-analysis of North American genome-wide association studies of asthma in 5,416 individuals with asthma (cases) including individuals of European American, African American or African Caribbean, and Latino ancestry, with replication in an additional 12,649 individuals from the same ethnic groups. We identified five susceptibility loci. Four were at previously reported loci on 17q21, near IL1RL1, TSLP and IL33, but we report for the first time, to our knowledge, that these loci are associated with asthma risk in three ethnic groups. In addition, we identified a new asthma susceptibility locus at PYHIN1, with the association being specific to individuals of African descent (P = 3.9 × 10(-9)). These results suggest that some asthma susceptibility loci are robust to differences in ancestry when sufficiently large samples sizes are investigated, and that ancestry-specific associations also contribute to the complex genetic architecture of asthma

Outcomes from elective colorectal cancer surgery during the SARS-CoV-2 pandemic

This study aimed to describe the change in surgical practice and the impact of SARS-CoV-2 on mortality after surgical resection of colorectal cancer during the initial phases of the SARS-CoV-2 pandemic

Beyond Q: Estimating Investment Without Asset Prices.” working paper

Abstract Empirical corporate finance studies often rely on measures of Tobin's Q to control for "fundamental" determinants of investment. However, since Tobin's Q is a good summary of investment behavior only under very stringent conditions, it is far better to instead use the underlying state variables directly. In this paper we show that under very general assumptions about the nature of technology and markets, these state variables are easily measurable and greatly improve the empirical fit of investment models. Even a general first or second order polynomial that does not rely on additional details about the nature of the investment problem accounts for a substantially larger fraction of the total variation in corporate investment than standard Q measures

Beyond Q: Estimating Investment without Asset Prices

Empirical corporate finance studies often rely on measures of Tobin’s Q to control for “fundamental ” determinants of investment. However, since Tobin’s Q is a good summary of investment behavior only under very stringent conditions, it is far better to instead use the underlying state variables directly. In this paper we show that under very general assumptions about the nature of technology and markets, these state variables are easily measurable and greatly improve the empirical fit of investment models. Even a general first or second order polynomial that does not rely on additional details about the nature of the investment problem accounts for a substantially larger fraction of the total variation in corporate investment than standard Q measures