On Stock Market Returns and Returns on Investment

Authors

  • FERNANDO RESTOY,

  • G. MICHAEL ROCKINGER

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    • Restoy is from the Bank of Spain. Rockinger is from Groupe HEC. We are grateful to Gary Chamberlain, Greg Mankiw, Philippe Weil, and an anonymous referee for helpful comments. Rockinger wishes to acknowledge financial support from the Fondation Nationale pour l'Enseignement de la Gestion des Entreprises.

ABSTRACT

This article presents general conditions under which it is possible to obtain asset pricing relations from the intertemporal optimal investment decision of the firm. Under the assumption of linear homogeneous production and adjustment cost functions (the Hayashi (1982) conditions), it is possible to establish, state by state, the equality between the return on investment and the market return of the financial claims issued by the firm. This result proves to be, in essence, robust to the consideration of very general constraints on investment and the inclusion of taxes.

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