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Limits-to-arbitrage, investment frictions, and the asset growth anomaly

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  • Lam, F.Y. Eric C.
  • Wei, K.C. John
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    Abstract

    We empirically evaluate the predictions of the mispricing hypothesis with limits-to-arbitrage suggested by Shleifer and Vishny (1997) and the q-theory with investment frictions proposed by Li and Zhang (2010) on the negative relation between asset growth and average stock returns. We conduct cross-sectional regressions of returns on asset growth on subsamples split by a given measure of limits-to-arbitrage or investment frictions. We show that: (i) proxies for limits-to-arbitrage and proxies for investment frictions are often highly correlated; (ii) the evidence based on equal-weighted returns shows significant support for both hypotheses, while the evidence from value-weighted returns is weaker; and (iii) in direct comparisons, each hypothesis is supported by a fair and similar amount of evidence.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 102 (2011)
    Issue (Month): 1 (October)
    Pages: 127-149

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    Handle: RePEc:eee:jfinec:v:102:y:2011:i:1:p:127-149

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Asset growth Capital investment Stock returns Investment frictions Limits-to-arbitrage;

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    Cited by:
    1. Lin, Xiaoji & Zhang, Lu, 2013. "The investment manifesto," Journal of Monetary Economics, Elsevier, vol. 60(3), pages 351-366.
    2. Watanabe, Akiko & Xu, Yan & Yao, Tong & Yu, Tong, 2013. "The asset growth effect: Insights from international equity markets," Journal of Financial Economics, Elsevier, vol. 108(2), pages 529-563.

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