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Investors know that stock returns depend on both a firm's current assets and growth potential. Current assets are easy to assess, but determining a firm's growth opportunities is less clear cut. Dimitris Papanikolaou, an assistant professor of Finance at the Kellogg School of Management and Leonid Kogan, a professor at MIT, examined how the heterogeneity of firms' growth opportunities leads to heterogeneity in their investment behavior and stock returns. Though a firm's total value is observable, it is difficult to estimate how much is derived from its existing assets versus its growth opportunities.
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