I study the interaction between risk premiums and lumpy investment in both time-series and cross-section. To this end, I incorporate an alternative sensitivity function into Campbell & Cochrane (1999) habit preference that produces 100% equity volatility under the volatile marginal utility and robustly matches investment dynamics under non-convex costs. Second, my model reproduces almost 100% equity premiums because the benchmark calibration assigns additional weights on precautionary savings and constrained firms, respectively. My model also generates considerable size premiums since small firms absorb more productivity risks. Finally, my model reasonably matches crucial moments of macro-dynamics and the cross-sectional investment rate.​

KeyWords: Habit Formation, Lumpy Investment, Firm Heterogeneity, Production-Based Asset Pricing, Size Premium