Expected investment growth and stock returns in an emerging market

Abstract

As a newly explored topic, the role of expected growth is assumed to have a positive relation with expected stock returns. The purpose of this study is to investigate whether expected investment growth is positively related to stock returns in the period of 2009-2018 in Turkey as an emerging market. For this evaluation, three proxies are calculated as 1-year-ahead expected growth, 2-years ahead expected growth, and 3-years-ahead expected growth. The results reveal that 1-year-ahead expected growth predicts the expected returns much better than the other proxies. Portfolio-level analysis supports the conclusion that investment plans for the future have a positive effect on the expected stock returns in an emerging market. Long-short spread of 1.51% occurs monthly at the 1% significance level, and the leading factor models are unable to capture the abnormal returns.