A deep-ingrained doctrine in asset pricing says that if an empirical characteristic-return relation is consistent with investor “rationality,” the relation must be “explained” by a risk (factor) model. The investment approach questions the doctrine. Factors formed on characteristics are...

A new factor model consisting of the market factor, an investment factor, and a return-on-equity factor is a good start to understanding the cross-section of expected stock returns. Firms will invest a lot when their profitability is high and the cost of capital is low. As such, controlling for...

A new methodology for equity valuation arises from the perspective of managers' supply of capital assets. Under q-theory, managers optimally adjust the supply of assets to changes in their market value. The first-order condition of investment then provides a valuation equation that infers asset...

We derive and test q-theory implications for cross-sectional stock returns. Under constant returns to scale, stock returns equal levered investment returns, which are tied directly to firm characteristics. When we use GMM to match average levered investment returns to average observed stock...

Interpreting accruals as working capital investment, we hypothesize based on q-theory that firms optimally adjust their accruals in response to discount rate changes. A higher discount rate means less profitable investments and lower accruals, and a lower discount rate means more profitable...

We study the interactions between the stock market and the labor market. When aggregate risk premiums are time-varying, predictive variables for market excess returns should forecast long-horizon growth in the marginal benefit of hiring and thereby long-horizon aggregate employment growth....

Within the standard search and matching model, time-to-build implies that high aggregate risk premiums should forecast low employment growth in the short run but high employment growth in the long run. If there is also time-to-plan, high risk premiums should also forecast low net hiring rates in...

We take a simple q-theory model and ask how well it can explain external financing anomalies, both qualitatively and quantitatively. Our central insight is that optimal investment is an important driving force of these anomalies. The model simultaneously reproduces procyclical equity issuance...

We derive and test q-theory implications for cross-sectional stock returns. Under constant returns to scale, stock returns equal levered investment returns, which are tied directly to firm characteristics. When we use GMM to match average levered investment returns to average observed stock...

The investment CAPM, in which expected returns vary cross-sectionally with investment, profitability, and expected growth, provides an equilibrium foundation for Graham and Dodd (1934). The q5 model is a good start to explaining prominent security analysis strategies, such as Abarbanell and...