Growth opportunities and Investment-Specific Technology Shocks.

We develop a firm specific measure of growth opportunities based on the covariance of the firm's stock return with a portfolio that is long investment and short consumption producers (IMC). Given that firms with high growth opportunities are the prime beneficiaries of investment-specific shocks, we use our measure to explore the effect of these shocks in the cross-section. We find that firms with high IMC betas increase investment by more following a positive investment shock. Capture this intuition in a parsimonious partial equilibrium model that quantitatively replicates our finding and also matches key features of asset prices in the data: firms with high Market to Book Equity or IMC betas have lower expected returns than low Market to Book Equity or IMC betas. Our model can replicate the value premium as well as the failure of the CAPM (conditional or unconditional) to price the cross-section of expected return.