美联储-外交经济政策的不确定性与美国股市回报 Foreign economic policy uncertainty and U.S. equity returns

InternationalFinanceDiscussionPapersForeigneconomicpolicyuncertaintyandU.S.equityreturnsMohammad.R.Jahan-Parvar,YuriyKitsul,JamilRahman,andBethAnneWilsonJahan-Parvar,Mohammad.R.,YuriyKitsul,JamilRahman,andBethAnneWilson(2024).“ForeigneconomicpolicyuncertaintyandU.S.equityreturns,”InternationalFinanceDis-/10.17016/IFDP.2024.1401.NOTE:InternationalFinanceDiscussionPapers(IFDPs)arepreliminarymaterialscirculatedtostimu-latediscussionandcriticalcomment.TheanalysisandconclusionssetfortharethoseoftheauthorsanddonotindicateconcurrencebyothermembersoftheresearchstafortheBoardofGovernors.ReferencesinpublicationstotheInternationalFinanceDiscussionPapersSeries(otherthanacknowledgement)shouldbeclearedwiththeauthor(s)toprotectthetentativecharacterofthesepapers.RecentIFDPsareavailableontheWebat/pubs/ifdp/.ThispapercanbedownloadedwithoutchargefromtheSocialScienceResearchNetworkelectroniclibraryatwww.ssrn.c1MohammadR.Jahan-ParvarYuriyKitsulJamilA.RahmanBethAnneWilson*AbstractWedocumentthatforeigneconomicpolicyuncertainty(EPUF)hassignificantincre-to12-months-aheadhorizons.WefindthatEPUFshocksprimarilytransmittoequityconsistentwiththistransmissionmechanism.Corporateinvestmentoutlays,payouts,JELClassification:G11,G12,C13,E20,E30.Keywords:Economicpolicyuncertainty,Cash丑ows,Discountrates,ICAPM,Returnpredictabil-ity,Transmissionchannels.*Jahan-Parvar,Kitsul,andWilsonarea伍liatedwiththeInternationalFinanceDivision,FederalReserveBoardofGovernors.Rahmanisa伍liatedwiththefinancedepartment,YaleSchoolofManagement.Pleasedirectcorre-spondencetoMohammadR.Jahan-Parvar(mohammad.jahan-parvar@).WethankSirioAramonte,AndrewDetzel,MatteoIacoviello,OscarJorda,NiklasKroner,SaiMa,JacksonMills(FMAdiscussant),Juan-MiguelLon-dono,DinoPalazzo,TatevikSekhposyan,EmreYoldas,andStijnVanNieuwerburghfordetaileddiscussionsandseminarparticipantsatFederalReserveBoard,NorthAmericanSummerMeetingoftheEconometricSociety(2021),FMAannualmeeting(2021),CFE(2021),MidwestEconometricsMeeting(2022,MichiganStateUniversity),Math-WorksFinanceConference(2023),andIRMC(2024,Milan).WethankJakeHarmonandBillLangforexcellentresearchassistance.Theanalysisandconclusionsarethoseoftheauthors,anddonotre丑ecttheviewsofothermembersoftheresearchstafortheBoardofGovernors.11IntroductionSeminalstudiesofBloom(2009),BasuandBundick(2017),andBaker,BloomandDavis(2016)establishthateconomicuncertaintyingeneralandeconomicpolicyuaboutfiscal,monetary,regulatoryandothereconomicpolicies–inparticular,afectrealeconomic2013)andBrogaardandDetzel(2015)showthatEPUpredictsbroadequitymarketindexreturnsintheUnitedStates.1Inaddition,thelatterstudyarguesthatEPUpredictabilityoperatesthroughAtthesametime,thecross-countryinteractionsofeconomicpolicyuncertaintyandequand(3)financialpress,marketanalysts,andfirmearningscallreportsfrequentlyciteuncertaintythatU.S.-basedcompaniesfrequentlydiscusscountryrisksoriginatingfromBrazil,Japan,andMexico,basedontextualanalysisoftheirearningscalls.ThispaequitymarketsbyinvestigatingwhetherforeignEPU(EPUF)helpsexplainfutureexcessequityreturnsintheU.S.,aswellasthechannelsthroughwhichEPUFshockstransmittotheU.S.stockreturns.Inparticular,weask(1)whetherEPUFpreditheU.S.;(2)howthepredictiveabilityofEPUFdifersacrossreturnsofequityportfoliosformedonfirmcharacteristicsthatmayafectreturnssensitivitytoforeignEPU(tobetterunderstandsourcesofaggregatepredictability);(3)whetherEPUFshockstransmittoequitypricesthroughtoEPUFshocksshedadditionallightonthetransmissionofEPUFshockstoU.S.stockprices.theUnitedStates.GlobalEPUre丑ectsperceive willhave.ToobtaintheforeignEPUmeasure,westriptheU.S.componentfromtheglobalEPU 1BrogaardandDetzel(2015)alsodemonstratethatEPUcommandsariskpremiuminthecross-sectionofU.S.equityreturns.2Notethattradeingoodsandservices(exportsplusimports)accountedforabout27%oftheUnitedStatesGDPin2018,upfromabout9.2%and20%in1960and1980,respectively.2byorthogonalizingglobalEPU(EPUG)withrespecttoitsU.S.counterpart(EPUUS).WetheninvestigatewhethertheconstructedEPUFmeasurehasincrementalpredicEPUFpredictsU.S.stockindexreturnsathorizonsbetween9to12monthsahead.Forreturnsofportfoliosformedonfirmincompaniesthataretypicallylarger,acquiremoreassets,hhorizonU.S.returnscomparedtoEPUUS,predictivepowerofwhichisconcentratedforhorizons1999),withinformationfromabroadtakinglongertodifusetoU.S.equitymarketscomparedtoequityprices(seeBianchi,LettauandLudvigson,2022,Chen,DaandZhao,2013,andCochrane,2011).Thisfindingisintuitive.Itislesslikelythatchangesineconomicpolicymateriallyandconsistentlyafectmonetarypolicy,policyrates,anddiscountratesintheUnitedStates.Ontheotherhand,domesticfirmswithinvestmentprojectsfollowingthearrivalofadverseforeignEPUbystudyingresponsesprecautionarydelaysindemandforcreditandcapitalexpenditure.Thatis,afterthearrivalofanEPUFshock,inaggregate,firmsreducedividenddistributions,aswellasborrowandinvestless. inU.S.EPU.ExamplesincludeP/astorandVeronesi(2012,2013)andBrogaardandDetzel(2015),whichfocusontherelationshipbetweenU.S.EPUandexpectedexcessreturns,aswellasKavianietal.(2020)andBonaimeetal.(2018),whichdocumentefectsofspreadsandmergersandacquisitionactivity,respectively.Cross-countryEPUspillovershavere-fthecross-borderefectsofEPUinequitymarkets,acountryEPUspilloversinequitymarketswithresultsonspilloverstomacro-financialvariables.3etal.,2019)oratfirmlevelasinHassan,Schreger,SchwedelerandTahoun(2024).Inparticular,Hassanetal.(2024)documenttherelationbetweenEPUlevelsandinvestmentandcapitalexpenditIon(2015).betweenpoliticalriskandfinancialmarkets.ExamplesincludeBoutchkova,Doshi,Durnevandturnsvolatility,Kelly,P/astorandVeronesi(2016)whoextractthepoliticaluncertaintyprotectionpremiums.Brogaard,Dai,NgoandZhang(2020)findthatpoliticaluncertaintymeasuredbytheItisintuitivelyplausiblethatpoliticaldevelopmentsintheUnitedStates–asthelargestandmostsignificantglobalfinancialcenter–meaningfullytransmittoothermarketsandafectinvestors’risktoleranceanddiscountraoverlap,theymeasurediferenttypesofrisk.policyuncertaintymeasure,andthemethodofextractionofforeign2DataWeusetheglobalandtheUnitesStatesEPUmeasuforJanuary1997toMay2021.3Weusethe3-componentindexversioEPUUS).Thisindexisaweightedaverageofthenews-basedEPU(50%),tax-codeexpiration 3See/index.html.WhileglobalEPUindexisonlyavailablefromJanuary1997,U.S.EPUisavailableforalongerperiod.4economicefectsofpoliciesthatarenotItisavailableintwoversions:currentpriceGDP-weightedandPPP-adjustedGDP-weighted.WeusethecurrentpriceGDP-weightedseriLudvigsonetal.(2021),activitymeasuressuchasAruobaetal.(2009),taintymeasureofHustedetal.(2020),ortradepolicyuncertaintyofCaldara,Iacoviello,Molligo,uncertaintymeasures,respectivtypesofuncertainty.4Thus,weremainfocusedonEPUinthisstudy.Wecollectmonthlydataforequityreturns,relevantfinancialandaccountingquantitiesingfactorsandfirmcharacteristicstheNYSE/AMEX/NASDAQexchangesfromthemergedCenterforResearchinSecurityPrices(CRSP),Compustat,CapitalIQ,andotherresourcesfromWhartonresearchdataservices(WRDS)FREDdatabasemaintainedbyFederalReserveBankofSt.Louis,andauthors’websites(suchasKennethFrenchandRobertShiller,amongothers).5WeinvestigatetherelationshipbquantitiestoforeignEPUshocks.Thefirststeprequirestheconstructionofaproxyf4ThesamplecorrelationsbetweenCaldaraetal.(2020)TPUindexandEPUUSandEPUGare0.37and0.57,respec-tively,inoursample.ThesecorrelationsforCaldaraandIacoviello(2022)GPRindexandEPUUSandEPUGare0.50and0.74,andthesequantitiesforLondonoetal.(forthcoming)REUindexandEPUUSandEPUGare0.31and0.35.5ThefollowingdatawereretrievedfromFRED,FederalReserveBankofSt.Louis:1)fromU.S.BureauofEconomicAnalysis:RealGrossDomesticProduct[GDPC1],/series/GDPC1;RealGrossPrivateDomesticInvestment[GPDIC1],/series/GPDIC1;Un-employmentRate[UNRATE],/series/UNRATE;2)fromChicagoBoardOp-tionsExchange:CBOEVolatilityIndex:VIX[VIXCLS],/series/VIXCLS;3)fromBoardofGovernorsoftheFederalReserveSystem(US),CommercialandIndustrialLoans,AllCommercialBanks[BUSLOANS],/series/BUSLOANS.See/pages/faculty/ken.french/datalibrary.htmlfordataonequityportfo-lioreturns,/fordataoncyclicallyadjustedprice-to-earningsanddividend-priceratios,and/novy-marx/datalib/index.htmlfordataonprofitabilityfactors.RealizedvolatilitydatausedinTable1arefromHeberetal.(2009).5f2.1ConstructionandeconomicsignificanceofforeignEPUGiventhesizeoftheU.S.eccountries.Inparticular,theyshowthatU.S.economicpolicyuncertaintynewscontaminateEPUmeasurementabroad.InTable1,wereportthatEPUUSandEPUGarehighlycorrelated,withacoe伍cientofcorrelationabout0.80.Thus,usingbothEPUGandEPUUSinpredictiveregressionsEPUUSbyfittingthefollowingregrEPUtG=h0+h1EPUtUS+vt.(1)WerenametheOLSregressionresiduals,t,fromfittingequation(1)todata“foreignEPU”orEPU.ThisvariablecapturesthevariationinEPUGthatis,byconstruction,uncorrelatedwithEPUUSattimet,buthaveacoe伍cientofcorrelationequalto0.59withEPUG.Thus,orthogo-nalizationisnecessarytodisentangletheefectsofglobalandU.S.ecTable2reportsthesummarystatisticsofthesemeasures.TheconstructedEPUFmeasureisin-tendedtobesimilar(instatisticalproperties)butlinearlyuncorrelatedtoEPUUS,asshowninthetable.WenotethatallthreeEPUmeasuresarecons(P/E)ratiosare0.98,0.95,and0.80,respectively.Throughoutthepaper,weuseEPUFanddemeanedvaluesofEPUUSintheanalysis.Figure1displaysthethreeEPUmeasures.Asmentionedequation(1),EPUFispositivevaluedwhenEPUGisgreaterthanitsfittedvalueimpliedbynegativespikeinEPUFcorrespondingtoSeptemberof2001.EPUFremainedinnegativforthebetterpartoftheGlobalFinancialCrisis(GFC)period.NotablepositivespikesinEPUF6Onecouldalsouseridgeregressionsorothersolutions.62016(theUnitedStatespresidentialelection).EPUFremainedinpositiveterritoryfrom2018tradingpartnersrose.ThebottomleftpanelofFigure1reportsthehistogramofEPUF.intoabeta-standard-deviationinEPUforeverystandard-variable,allelseequal.ThwhereEPUisoneofthetvariables,andeareerrorterms.WeincludeVIXandoption-impliedvolatilityforEuroSTOXX50index(VSTOXX),thespreadbetween10-yearand1-yearU.S.TreasurybondandGermanbundyields(Spread),thespreadbetweenU.S.BBBandAAAnon-financialcorporatebondyields(defaultspreadorDef.),thesmoothedlogprice-dividendratios(log(P/D))forS&P500andEUROSTOXX600indexes.WealsoincludeFederalReserveBankofChicago’snationalactivityindex(CFNAI)andlogvaluesoftheBalticDryIndex(BDI),ashippingfreight-costindexthatactsasabellwetherforinternationalm.7WereportU.S.-andeuro-areaspevaluesofVIXandVSTOXXforEPUUSarepositive-valuedandsignificant.OtherestimatedjforEPUUSthatarestatisticallydiferentfromzeroincludeU.S.andeuro-areaP/Dratios,Germanspreads,CFNAI,theBDI(negative-valued),andU.S.Treasuries’spread(positive-valued).ForEPUGratios,Germantermspreads,theBDI(negative-valued),andVIX(positive-valued).ThebottomU.S.defaultspread,U.S.P/D,VIX,VSTOXX,Germanspreads,theBDI(negative-valued),andCFNAIandeuro-areaP/D(positive-valued).ThenegativerelationshipofallEPUmeasureswiththeBDIindexisinterestingandinformative:whentradeintensityrises(recedes),bothdomesticandforeignEPUmeasuresdecline(rise).ThisrelationshipswithP/DratiosimplythatEPUFishigh(low)whentimesare“bad”(“good”)7Univariateresultsareavailable,butnotreported.7eitherintheU.S.orabroad.ThiscountercyclicaldynamicsofEPUFmaybebehindthemeasure’spredictivepowerforthetime-seriesofU.2.2ConstructionofforeignEPUshocksEPUFisquitepersistent.AsshowninTable2,thevaluesofitsfirstandtenthautocorrelationcoe伍cientsare0.89and0.71,respectively.Thus,themovesinEPUFlevelvalues,albeitsizeable,indexes.WeusethemethoddescribedinDiercks,HsshockextractionprocedureechoesmanyelementsofYt=A0+A1Yt-1+";(3)followingorderingofvariables:EPUGindex,EPUUSindex,thelogoftheMSCIACWI(excludingUnitedStates)index,andthefederalfundsrate.A0isavectofcoe伍cients,and"istheshockontheAkaikeinformationcriteria(AIC),andtreatthefirstcolumnvectorin(=Yt-t)asEPUFshocks.8TheinternationalorientationofourexerciseasetofvariablescomparedtoDiercksetal.(2024).First,insteadofS&P500index,weuseMSCIadditiontoEPUG,wealsoincludeEPUUSintheprocedure.Third,sinceglobalmeasuresof 8TheorderofCholeskydecompositionassumesnofeedbackfromEPUGtoEPUUS,whichcouldnotalwaysbethecase.Therefore,theresultsshownlatercouldbeviewedaslowerboundsfortheefectofEPUFshocks.83AggregateandportfolioexcessreturnspredictabilityThroughoutthissection,wediscusspredictabilityofU.S.broadequityindexreturnsandthoseofthedata:aheadpredictions)over1-monthU.S.TreasuryBillrate(hencefobrevity)9,EPUisconstructedasinSection2.1,andEPUisthedemeanedU.S.EPUmeasureofBakeretal.(2016),Zsarecontrolvariables(discussedbelow),andfinallyε,t+kisanerrorterm.Sinceeconomicpolicyuncertaintyindexesareultimatelymeasuresofrisk,weexpectthatestimatedslopeparametersforEPUFandEPUUSinequation(4),and,tobepositivevalued,asintheconventionalMerton(1973)-stylerisk-returntradeofrelationship.Toavoibias,weconstructforeignEPUmeasureattimetwithdataavailableonlyuptotimetforeachSimilartoBrogaardandDetzel(2015),Weincludethefollowingcontrolvariables:theNBERrecessionindicator,10-yearover1-yearU.S.Treasurybondspreads,BBB-AAAcorporatebondspreads,Shiller's(log)cyclically-adjustedaggregateP/E(CAPE)ratios,monthlychangesinVIXoption-impliedvolatilityindex(△VIX),monthlygrowthratesoftheindustrialproductionindex(△IPt),andtheCFNAIindex.10WealsoincludetwoofFamaandFrench(1992)threefactors:size(SMB)andvaluepremium(HML),sincemarketfactor(CRSPvalue-weightedreturns)isoneofandTitman(1993)andChan,JegadeeshandLakonishok(1996)\reversalIfallφj=0,thenweonlyobservethepredictivepowerandtheabilityofEPUmeasuresinpowerofeitherEPUUSorEPUF.Ideally,weexpectεstobei.i.d.standardnormal.However,correlationandheteroscedasticity.Toaddressthisproblemandsimilartandserialcorrelation-consistent(HAC)standarderrorsfortheestimatedparameters.119Thisspecificationimpliesaholdingperiodofonemonth,rolledovertothenext.10TheCFNAIseriesdoesnothaveatime-trendcomponent.Otheroption-impliedmeasuresforheadlineequitypriceindexesinmajoreconomiesexist.Theseindexestendtocloselyco-movewithVIX,seeTable1.Asaresult,andtosavespace,weonlyreportresultsbasedonVIXasanalternativeaggregatevolatilityproxyinthisstudy.11SinceEPUmeasuresarelesspersistentthantypicallong-termpricingvariablessuchasP/EorP/Dratios(Section93.1AggregateexcessreturnsAsmentionedearlier,weexpectthattfthisassertionistrueandasu伍cipredictivepowerforEPUF–whichmeasurespolicyuncertaintyunrelatedtoU.S.news–forbroadequitymarketindexreturns.Ourgoalinthissectionistestingthishypothesis.WeshowthatEPUFVeronesi(2013)andBrogaardandDetzel(2015),whoalreadyestablishEPUUS’spredictiveability.andCRSPvalue-weighted,respectively).WereportourfindingsinTable4.Asinpreviousstofvalue-weightedCRSPportfolio,comprisingalltradedstocksintheNYSE/AMEX/NASDAQreturnsarealsopredictablebyEPUmeasures.12WeonlyreportslopeparametersforexplainingthevariationsincumulativeindethemodelwithcontrolsandthosewitWefirstestablishthatEPUUSpredictsS&P500returnsatk=2to12andCRSPvalue-weightedBrogaardandDetzel(2015),respectively(notshown).Wenextfitequation(4)todata.InthepresenceofEPUUSandcontrolvariableslNasdaqreturnsarepredictablebyEPUFatk≥6andforCRSPvalue-weightedandS&P500returnsatk≥9.AbsentcontrolvariablesbutwithEPUUSstillpresent,theseresultsgenerallyhold,albeitatslightlylowersignificancelevels.EPUFpredictsRussell2000retuwhilethesereturnsarepredictablebyEPUUSandestimatedslopeparameters2.1),webelievethatNeweyandWest(1987)correctionstostandarderrorsaresu伍cienttoaddresstheissuesthatarisefromusingoverlappingreturns,generatedvariables,andseriallycorrelatedorheteroscedasticresidualsinpredictiveregressions.AsnotedinSection3.2,usingbootstrappedstandarderrorsasanalternativeremedydonotmateriallychangeourempiricalfindings.12NasdaqCompositeisavalue-weightedindexthattracksmorethan3,000firmstradedontheNasdaqStockMarket.Theindexisdominatedbytechnologysectorwithabout50%weight,followedbyconsumerservicesandhealthcaresectorswithabout20and10%weights,respectively.kincreases.ThispatternisnotpresentforEPUF,whichimpliesthattheoppositemightholdforforeignpolicyuncertainty:thatEPUUSandsomecontrolvariablesaccountforpotentialEPUF’spredictabilityinshortechanneloffirmswithstatisticallysignificantexposuretotoappearinfirms’financialoroperationalcommunications,andmarket’sreaction,leadingtothepredictabilitypatternsdocumentedabove.Harveyetal.(2015).AdjustedR2sincreaseinkuniformly.Forpredictivehorizonswhereestimated1statisticallydiferentfromzero,EPUFandEPUUStogetherainreturns(Nasdaqatk=6andCRSPvalue-weightedatk=12,respectively).Thesevaluesarebasedonmodelswithnocontrolvariables,andthusadjusmeasuresinaccountingforvariationsinreturns.Onbalance,EPUFcontributestoabouthalfofEstimatedisforbothEPUandEPUaregenerallypositive-valued.Theseresultsarecon-thatinvestorsdemandpositiveexp•Sizemaynotbethesoledeterminingfactor.EPUFpredictsbothCRSPandS&P500returns.WhileS&P500returnsbyconstructionrepresentthelargestU.S.-listedcompanies,CRSPtradedfirms.Manylargecorporationsaremultinationalswithsignificantinternationalsales,notdiferentfromzero,while1sarestatisticallydiferentfromzerofork≥6regardlessofcontrolvariable’presence.ThisobservationmeansthatEPUFhasnotablepredictivepowerevidence(albeitmuchweaker)thatsmlongerhorizonsbyEPUF.Thus,webelievethatEPUFappearstopredictreturnsfora13Incontrast,asdocumentedbyCampbellandAmmer(1993)andPindyckandRotemberg(1993)amongmanyothers,thetimerequiredfordiscountrateshockstoafectpricesarenotablyshorter.thecharacteristicsofcompaniesthatareafectedbychangesinforeignpolicyuncertaintyin•TherearesimilaritiesandalsointriguingdiferencesinpatternsofpredictabilitybetweenEPUFandEPUUS.Basedonsimilarities,theyarebothuncertaintyfactorsthathavepredic-tivepowerforU.S.aggregatereturwithrespecttopredictionhorizonkandtheirinteractionswithcontrolvariablesmentionedabove,theyappeartooperateindiferenthorizonsandafectdiferentdriversofassetprices.andDetzel(2015),andimplythatEPUFpredictslonger-durationelementsofassetprices.•Wefindunambiguous,positive,andstatisticallysignificantrisk-returntradeofbetweencurrentlevelsofeconomicpolicyuncertaintyandfutureaggregatereturns.Inclusionofcommonpricingfactorsdoesnotweoftheestimatedslopeparametersaregenerallyinvarianttoincfactors.3.2RobustnesschecksforaggregatereturnsWecarryoutteststoassesstherostsandwethusconcludethatEPUFindeedpredictscumulativefresultsintheAppendix.First,aconcernisusinggeneratedvariisageneratedvariableanditsinclusionmayleadtounder-rejectionofthenullhypothesisthatβ=0.AcommonremedyistousebootstrappedstandarderrorsinconstructingStudent-tstatistics,insteadofNewey-Weststandarderrors.WefollowthePascual(2002)andgeneratebootstrappedstandarderrothestatisticalsignificanceofEPUmeasestimatedslopeparametersforEPUF,,continuetoremainstatisticallydiferentfromzero.mentum)areadequatecontrolvariablesinestimatedmodelsandwhetherpredirobusttotheinclusionofinternationalpricingfactors.Sinceinternationalfactorsareavailablefactorstheirdeveloped-economycounterparts.Ourpredictiveresultsarerobusttotheinclusionof3.3Portfolioexcessreturnsexample,GulenandIon(2015)andGreenlandetal.(2019)showthathigherEPUisassociatedwithdeclinesincorporateinvestments,while,positionedtowithstandpolicyuncertaintyshthemmoreexposedtoforeignEPUshocks.Thus,arelevantquestioniswhether(foreign)EPUafectsfuturereturnsforhiconstructedalongcertainfirmcharacteristics,over1-monthTreasuryBillratestoisolatefeaturesthatsignalstocks’sensitivitytoEPUF.Tothisend,wetestwhetherforeignordomesticEinEPUmeasures’predictivepowerforparticulathebottomtercilesorquartiles.presentedinequation(4),fittingittodatawherer,t+karereturnsonaparticularportion–orempiricalfindings. 14WealsoreportresultsforthefollowingfactorsintheAppendix:book-to-marketratio,operatingprofitability,andidiosyncraticvolatility.percentportfolioreturns,comprisedofthelargestcompaniesbymarketvaluation,byEPUFfork≥9.Thebottom30percentportfolioreturnsdonotdisplaysuchpredictabilitybyEPUF,althoughEPUUSpredictsbothlargeandsmallcompanyportfolioreturnsatk≤9horizons.Thesizepremium,arenegativelypredictablebyEPUFatallhorizons(primarilyaproductofEPUFloadingsforsmall-sizeportfolioreturnsthatarenotstatisticallydiferentfromzero,andloadingsforlarge-sizeportfolioreturnsthatare).EPUUShasstatisticallysignificantandpositive-valuedloadingsforSMBportfolthechangeintotalassetsfromthefiscalyearendividedbyt-2totalassets.Thisisabroaddefinitionofinvestments.Westudycapital-expenditure-toforeignEPUshocks.investmentandsize(toisolatetheefectsoffirmsize)pcolumns.EstimatedslopeparametersforEPUFarepositive-valuedandstatisticallysignificantfinvestmentportfolioreturns.Forsixmonthsandabovehorizons,thediferencesbetweenEPUFsincetheEPUFloadingforlow-investmentportfolioreturnsisnotstatisticallydiferentfromzero,horizons,thediferencesbetweenEPUUSloadingsofpositiveandstatisticallysignificant,primarilydrivenbyrelativelyhighloadingoflow-investmentInthefaceofhigherEPUF,high-investmentfirmsmayneedtopartiallyadjustinvestmentsinvestmentfirmsarenotafectedbyhigherEPUF,asaresult,theircurrentequitypricesandexpectedreturnsremainlittlechanged.Incontrast,whenfacedwithalow-investmentfirmstendtobeconstrainedinthatapanelof14countries(includingtheUni(2015)convincinglyestablisharobust,negativerelationshipandfirm-levelcapitalinvestment,CapEx,withthisrelationshipbeingstrongerforfirmswithaEPUandfuturereturnsofhigh-andlow-CapExfirms.Apriori,weexpecttofindpatternssimilarWeinvestigatetheroleofcorporatecFama-Frenchapproach.Thevalueofinvestmentonplf30%andthemiddle40%).Wethenfitequation(4)usingCapExportfolioreturnsandreporttheresultsinTable7.EPUUSpredictsCapExportfolioreturnsfork≤3,andEPUFdoessofork>6.Incontrasttoournullhypothesis,wefindlargerloadingsforlow-CapExreturnscomparedtohigh-CapEx.EPUFpredictiveresultsaresensitivetosizesorting,andarenotdetectedfors