Do firms extract information from their own stock prices when making investment decisions? To answer this question, we use and extend an econometric errors-in-variables remedy, which is appropriate because movements in the stock price in which the manager takes little interest can be treated...

The neoclassical q-theory is a good start to understand the cross section of returns. Under constant return to scale, stock returns equal levered investment returns that are tied directly with characteristics. This equation generates the relations of average returns with book-to-market,...