Growth Opportunities, Technology Shocks, and Asset Prices




    Search for more papers by this author
    • Leonid Kogan is with MIT Sloan School of Management and NBER. Dimitris Papanikolaou is with Kellogg School of Management and NBER. We thank the Editor (Cam Harvey), two anonymous referees, Hengjie Ai, Frederico Belo, Lorenzo Garlappi, Burton Hollifield, Roberto Rigobon, and Toni Whited, and seminar participants at the American Economic Association meetings, Berkeley, Federal Reserve Bank Minneapolis, Tepper Macro-Finance conference, NBER Capital Markets, MIT Sloan, Northwestern University, University of Piraeus, Stanford Graduate School of Business, and University of British Columbia Summer Finance Conference for helpful comments and discussions. We thank Giovanni Violante and Ryan Israelsen for sharing with us the quality-adjusted investment goods price series. Dimitris Papanikolaou thanks the Zell Center for Risk Research for financial support.


We explore the impact of investment-specific technology (IST) shocks on the cross section of stock returns. Using a structural model, we show that IST shocks have a differential effect on the value of assets in place and the value of growth opportunities. This differential sensitivity to IST shocks has two main implications. First, firm risk premia depend on the contribution of growth opportunities to firm value. Second, firms with similar levels of growth opportunities comove with each other, giving rise to the value factor in stock returns and the failure of the conditional CAPM. Our empirical tests confirm the model's predictions.