Essays in Investment-Based Asset Pricing

Chapter 1 considers the difference between intangible and physical investment rates and investigates the asset pricing implications of such difference. I use an investment-based model with intangible capital and an aggregate adjustment cost shock to study the asset pricing implications of intangible investment frictions. The model predicts lower returns for firms with higher intangible investment rates, and higher returns for firms with higher relative intangible investment rates, a key metric I define as the ratio of intangible investment rates to physical investment rates. The model is supported by empirical findings indicating that firms with higher intangible investment rates have on average 3% lower annual returns, and firms with higher relative intangible investment rates have on average 4% higher annual returns. The results show there are more frictions in intangible investment than physical investment, an essential feature of intangible capital.;Chapter 2 tests predictions from a model with labor adjustment cost for industry portfolios. I use an investment-based model with labor hiring and an aggregate adjustment cost shock proposed by Belo, Lin, and Bazdresch (2014) to study the asset pricing implications of labor market frictions. The model predicts lower returns for industries with higher dispersions of hiring rates. The prediction is supported by empirical finding indicating that firms from industries with higher dispersions of hiring rates have on average 5% lower annual returns. The results show the importance of labor frictions to explain asset returns across industries.;Chapter 3 examines the empirical relationship between labor shares and stock returns. In both US and European stock markets, firms with higher ratios of labor expenses to total values added have on average 4% higher annual returns than firms with lower ratios. The return differential cannot be explained by factors including market, size, value, and momentum or operating leverage. I propose a model with scholastic labor mobility shocks to explain the positive labor share premium. Firms with higher labor shares are risker because they are more sensitive to the labor mobility shock.