What Moves Investment Growth?

We use accounting identities to decompose unexpected changes in investment growth into surprises to current cash-flow growth and stock returns, and revisions of expectations about future cash-flow growth and future discount rates. Using a vector autoregressive model we find that current cash-flow su...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 2016-12, Vol.48 (8), p.1613-1653
Main Authors: CHEN, LONG, DA, ZHI, LARRAIN, BORJA
Format: Article
Language:English
Subjects:
Cash flow
cash flow news
Correlation analysis
discount rate news
Discount rates
E22
earnings shocks
Economies of scale
G12
investment growth
Investment policy
Investments
q-theory
Rates of return
Regression analysis
Studies
variance decomposition
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Summary:We use accounting identities to decompose unexpected changes in investment growth into surprises to current cash-flow growth and stock returns, and revisions of expectations about future cash-flow growth and future discount rates. Using a vector autoregressive model we find that current cash-flow surprises account for the largest element of the variance decomposition. Investment growth and current cash-flow surprises are negatively correlated with news about future cash-flow growth, which can be expected from persistent productivity shocks and decreasing returns to scale. We find little evidence of a discount rate channel for investment since return terms are small and have unintuitive signs.
ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.12360