Firm characteristics and stock returns: The role of investment-specific shocks

Leonid Kogan, Dimitris Papanikolaou*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

81 Scopus citations


Average return differences among firms sorted on valuation ratios, past investment, profitability, market beta, or idiosyncratic volatility are largely driven by differences in exposures of firms to the same systematic factor related to embodied technology shocks. Using a calibrated structural model, we show that these firm characteristics are correlated with the ratio of growth opportunities to firm value, which affects firms' exposures to capital-embodied productivity shocks and risk premia. We thus provide a unified explanation for several apparent anomalies in the cross-section of stock returns - namely, predictability of returns by these firm characteristics and return comovement among firms with similar characteristics.

Original languageEnglish (US)
Pages (from-to)2718-2759
Number of pages42
JournalReview of Financial Studies
Issue number11
StatePublished - Nov 2013
Externally publishedYes


  • E22
  • G10
  • G11
  • G12

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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