The Cross-Section of Industry Investment Returns

Abstract

Firm level characteristics explain the cross section of investment returns of industry portfolios that include listed and unlisted firms. Moreover, common asset pricing models explain the cross-sectional variation of characteristic-based investment returns which include listed and unlisted firms. Assuming that managers of unlisted fi rms are less likely to be affected by investor misvaluation and are less likely to overinvest, our results are consistent with a rational interpretation of the role of characteristics. Given a portfolio characteristic, there are no systematic differences in expected investment returns for listed and unlisted fi rms suggesting their cost of equity are unrelated to whether a rm is listed or unlisted.