Profitability, asset investment, and aggregate stock returns

Timothy K. Chue; Jin Karen Xu

doi:10.1016/j.jbankfin.2022.106597

Profitability, asset investment, and aggregate stock returns

Timothy K. Chue
, Jin Karen Xu

Research output: Journal article publication › Journal article › Academic research › peer-review

11 Citations (Scopus)

Abstract

We find that aggregate profitability and asset investment exhibit robust joint predictive power for aggregate excess stock returns, consistent with the investment model of Hou, Xue, and Zhang (henceforth HXZ, 2015). These results provide out-of-sample empirical support for HXZ, as the same mechanisms that HXZ use to explain firm-specific variation in stock returns can also be used to explain variation that is market-wide in nature. Also consistent with the HXZ investment model, we find that the growth rate of short-term (long-term) assets exhibits a stronger predictive power for one-year-ahead (two-year-ahead) stock returns.

Original language	English
Article number	106597
Journal	Journal of Banking and Finance
Volume	143
Early online date	3 Jul 2022
DOIs	https://doi.org/10.1016/j.jbankfin.2022.106597
Publication status	Published - Oct 2022

Keywords

Aggregate stock return forecasts
Asset growth
Discount rates
Profitability

ASJC Scopus subject areas

Finance
Economics and Econometrics

More information

10.1016/j.jbankfin.2022.106597

http://hdl.handle.net/10397/95563

Cite this

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title = "Profitability, asset investment, and aggregate stock returns",

abstract = "We find that aggregate profitability and asset investment exhibit robust joint predictive power for aggregate excess stock returns, consistent with the investment model of Hou, Xue, and Zhang (henceforth HXZ, 2015). These results provide out-of-sample empirical support for HXZ, as the same mechanisms that HXZ use to explain firm-specific variation in stock returns can also be used to explain variation that is market-wide in nature. Also consistent with the HXZ investment model, we find that the growth rate of short-term (long-term) assets exhibits a stronger predictive power for one-year-ahead (two-year-ahead) stock returns.",

keywords = "Aggregate stock return forecasts, Asset growth, Discount rates, Profitability",

author = "Chue, \{Timothy K.\} and Xu, \{Jin Karen\}",

note = "Funding Information: We thank two anonymous reviewers, Geert Bekaert (the editor), Jia Chen, Chengbo Fu, Amit Goyal, Campbell Harvey, Byoung Kang, Xiaomeng Lu, Sheridan Titman, Akiko Watanabe, John Wei, Steven Wei, Takeshi Yamada, Wayne Yu, Lu Zhang, and seminar participants at the SFS Cavalcade Asia-Pacific in Beijing, the Greater China Area Finance Conference in Xiamen, China International Conference in Finance in Tianjin, the Asian Finance Association Annual Meeting in Tokyo, and the Hong Kong Polytechnic University for helpful comments, and the General Research Fund of the Research Grants Council of the Hong Kong Special Administrative Region, China (Project No. 15501515) for research support. Publisher Copyright: {\textcopyright} 2022 Elsevier B.V.",

year = "2022",

month = oct,

doi = "10.1016/j.jbankfin.2022.106597",

language = "English",

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AU - Chue, Timothy K.

AU - Xu, Jin Karen

N1 - Funding Information: We thank two anonymous reviewers, Geert Bekaert (the editor), Jia Chen, Chengbo Fu, Amit Goyal, Campbell Harvey, Byoung Kang, Xiaomeng Lu, Sheridan Titman, Akiko Watanabe, John Wei, Steven Wei, Takeshi Yamada, Wayne Yu, Lu Zhang, and seminar participants at the SFS Cavalcade Asia-Pacific in Beijing, the Greater China Area Finance Conference in Xiamen, China International Conference in Finance in Tianjin, the Asian Finance Association Annual Meeting in Tokyo, and the Hong Kong Polytechnic University for helpful comments, and the General Research Fund of the Research Grants Council of the Hong Kong Special Administrative Region, China (Project No. 15501515) for research support. Publisher Copyright: © 2022 Elsevier B.V.

PY - 2022/10

Y1 - 2022/10

N2 - We find that aggregate profitability and asset investment exhibit robust joint predictive power for aggregate excess stock returns, consistent with the investment model of Hou, Xue, and Zhang (henceforth HXZ, 2015). These results provide out-of-sample empirical support for HXZ, as the same mechanisms that HXZ use to explain firm-specific variation in stock returns can also be used to explain variation that is market-wide in nature. Also consistent with the HXZ investment model, we find that the growth rate of short-term (long-term) assets exhibits a stronger predictive power for one-year-ahead (two-year-ahead) stock returns.

AB - We find that aggregate profitability and asset investment exhibit robust joint predictive power for aggregate excess stock returns, consistent with the investment model of Hou, Xue, and Zhang (henceforth HXZ, 2015). These results provide out-of-sample empirical support for HXZ, as the same mechanisms that HXZ use to explain firm-specific variation in stock returns can also be used to explain variation that is market-wide in nature. Also consistent with the HXZ investment model, we find that the growth rate of short-term (long-term) assets exhibits a stronger predictive power for one-year-ahead (two-year-ahead) stock returns.

KW - Aggregate stock return forecasts

KW - Asset growth

KW - Discount rates

KW - Profitability

UR - https://www.scopus.com/pages/publications/85134753971

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DO - 10.1016/j.jbankfin.2022.106597

M3 - Journal article

AN - SCOPUS:85134753971

SN - 0378-4266

VL - 143

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

M1 - 106597

ER -

Profitability, asset investment, and aggregate stock returns

Abstract

Keywords

ASJC Scopus subject areas

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