Macroeconomic News in the Cross Section of Asset Growth (WP) w/ Hou, Hugon, and Lyle

with Y. Hou, A. Hugon, and M. Lyle


Firms make forward-looking decisions. We provide evidence that firms’ investment decisions contain news about future aggregate conditions. This information is best extracted by dimension-reduction techniques. The investment-based signal improves upon the widely-used GDP forecasts found in the Survey of Professional Forecasters. We appeal to news-driven business cycle theory to explain our result, suggesting that these investment decisions contain firms’ information about future productivity shocks. This theory also helps us to understand why accounting-based measures of investment reveal the news while market-based measures of value do not.