[We investigate the asset pricing and macroeconomic implications of the ratio of new orders (NO) to shipments (S) of durable goods. NO/S measures investment commitments by firms, and high values of NO/S are associated with a business cycle peak. We find that NO/S proxies for a short-horizon component of risk premia not identified in prior work. Higher levels of NO/S forecast lower excess returns on equities and many types of bonds, at horizons from one month to one year. These effects are generally robust to the inclusion of common return predictors and are significant on an out-of-sample basis as well. We also address the term structure of risk premia by constructing a similar ratio to measure longer-term investment commitments, which predicts returns primarily at longer horizons.]

We examine the relation between inventory investment and the cost of capital in the time series and the cross section. We find consistent evidence that risk premiums, rather than real interest rates, are strongly negatively related to future inventory growth at the aggregate, industry, and firm levels. The effect is stronger for firms in industries that produce durables rather than nondurables, exhibit greater cyclicality in sales, require longer lead times, and are subject to more technological innovation. We then construct a production-based asset pricing model with two types of capital, fixed capital and inventories, to explain these empirical findings. Convex adjustment costs and a countercyclical price of risk lead to negative time series and cross-sectional relations between expected returns and inventory growth.

This paper investigates the behavior of the ratio of new orders to shipments of durable goods (NO/S). High levels of NO/S are associated with a business cycle peak. They predict a short-run increase in employment and fixed and inventory investment but a dramatic long-run decline in employment, fixed investment, inventories, and GDP as a whole. We also find that NO/S captures time-varying risk premia. Higher levels of NO/S forecast lower excess returns on a broad set of assets, including equities, longand intermediate-term Treasury bonds, and high- and low-grade corporate bonds, at horizons from one month to one year. These effects are robust to the inclusion of all common return predictors. We then construct an equilibrium model of investment with time to plan and a countercyclical price of risk which implies that the ratio of new orders to shipments is procyclical and predicts lower excess returns.