Firm‐Level Productivity and Stock Return: Evidence from Taiwan

We examine whether firm‐level total factor productivity (TFP) in Taiwan predicts the cross section of stock returns. We estimate TFP in Taiwan and find that, in contrast to negative relationships documented for US firms, high TFP firms earn higher expected returns than low TFP firms. We propose high adjustment costs of intangible investment as the underlying mechanism. High TFP firms exhibit greater adjustment costs of intangible investment, and the return premium is stronger among firms with higher intangible intensity. The premium is concentrated during economic downturns, consistent with the TFP premium varying over the business cycle. Our evidence underscores the role of intangible investment in Taiwan.