Finance Seminar: Lorenzo Garlappi
Risk Exposure to Investment Shocks: A New Approach Based on Investment Data
We propose a new approach to determine firms' return exposure to investment-specic technology (IST) shocks. Based on the idea that IST shocks affect firms through their cost of investment, we show analytically that firms' return exposure to IST shocks can be estimated from observable investment data. We apply our investment-based approach to the cross-section of book-to-market portfolios and find that value firms have higher exposure to IST shocks than growth firms, in contrast to the pattern estimated from IST proxies. The empirical findings provide an independent perspective on the economic mechanism through which IST shocks affect asset prices.