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Does q-theory with investment frictions explain anomalies in the cross section of returns?

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  • Li, Dongmei
  • Zhang, Lu
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Abstract

Q-theory predicts that investment frictions steepen the relation between expected returns and firm investment. Using financing constraints to proxy for investment frictions, we show only weak evidence that the investment-to-assets and asset growth effects in the cross section of returns are stronger in financially more constrained firms than in financially less constrained firms. There is no evidence that q-theory with investment frictions explains the investment growth, net stock issues, abnormal corporate investment, or net operating assets anomalies. Limits-to-arbitrage proxies dominate q-theory with investment frictions in explaining the magnitude of the investment-to-assets and asset growth anomalies in direct comparisons.

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Bibliographic Info

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

Volume (Year): 98 (2010)
Issue (Month): 2 (November)
Pages: 297-314

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Handle: RePEc:eee:jfinec:v:98:y:2010:i:2:p:297-314

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

Related research

Keywords: Investment-based asset pricing Asset pricing anomalies Investment frictions The discount rate Financing constraints;

References

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Citations

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Cited by:
  1. Leonid Kogan & Dimitris Papanikolaou, 2012. "Growth Opportunities, Technology Shocks, and Asset Prices," NBER Working Papers 17795, National Bureau of Economic Research, Inc.
  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.
  3. Lam, F.Y. Eric C. & Wei, K.C. John, 2011. "Limits-to-arbitrage, investment frictions, and the asset growth anomaly," Journal of Financial Economics, Elsevier, vol. 102(1), pages 127-149, October.
  4. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer, vol. 26(1), pages 3-38, March.
  5. Cooper, Ilan & Priestley, Richard, 2011. "Real investment and risk dynamics," Journal of Financial Economics, Elsevier, vol. 101(1), pages 182-205, July.
  6. Lin, Xiaoji & Zhang, Lu, 2013. "The investment manifesto," Journal of Monetary Economics, Elsevier, vol. 60(3), pages 351-366.

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