Technology spillover, corporate investment, and stock returns

This study examines the role of technology spillover in the negative relationship between corporate investment and subsequent stock returns. Technology spillover is a well-documented phenomenon in the asset pricing literature. We employ asset growth, real investment, and net share issuance as proxies for corporate investment. The results reveal a strong negative relationship between corporate investment and stock returns when firms have a high level of technology spillover. These results are consistent with the dynamic Q-theory of Li, Livdan, and Zhang (2009); investment opportunities can cause a more substantial asset pricing effect associated with corporate investment. This study also examines the role of technology spillover in the positive relationship between corporate profitability and subsequent stock returns. The results indicate a positive relationship between profitability and stock returns for firms with lower levels of technology spillover.