Endogenous technological progress and the cross-section of stock returns

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I study the cross-sectional variation of stock returns and technological progress using a dynamic equilibrium model with production. Technological progress is endogenously driven by research and development (R&D) investment and is composed of two parts. One part is devoted to product innovation; the other, to increasing the productivity of physical investment. The latter is embodied in new tangible capital. The model breaks the symmetry assumed in standard models between tangible and intangible capital, in which the accumulation processes of tangible and intangible capital stock do not affect each other. Qualitatively and, in many cases, quantitatively, the model explains well-documented empirical regularities.

Original languageEnglish (US)
Pages (from-to)411-427
Number of pages17
JournalJournal of Financial Economics
Issue number2
StatePublished - Feb 2012
Externally publishedYes

Bibliographical note

Funding Information:
This paper is based on Chapter 1 of my doctoral dissertation at the University of Minnesota. I am grateful to my committee members Frederico Belo, John Boyd, Murray Frank, Tim Kehoe, and especially Robert Goldstein (chair) and Lu Zhang for their valuable advice and continual encouragement. I thank Antonio Bernardo, Laurent Fresard, John Kareken, Sam Kortum, Ellen McGrattan, Pedram Nezafat, Monika Piazzesi, Lukas Schmid, Chun Xia, and Suning Zhang for their comments. I thank the seminar participants at Arizona State University, Indiana University, London School of Economics and Political Science, New York University, University of Michigan, University of Minnesota, University of Toronto, University of Washington at Seattle, and the 2007 Financial Management Association Doctoral Students Consortium and the Western Finance Association 2008 meetings. I thank Ryan Israelsen for sharing the quality-adjusted investment goods price series. I acknowledge the support of the Carlson School Dissertation Fellowship. All errors are my own.


  • Physical investment
  • R&D investment
  • Stock return
  • Technological progress


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