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  • Laura X. L. Liu
  • Toni Whited
  • Lu Zhang

Abstract

The neoclassical q-theory is a good start to understand the cross section of returns. Under constant return to scale, stock returns equal levered investment returns that are tied directly with characteristics. This equation generates the relations of average returns with book-to-market, investment, and earnings surprises. We estimate the model by minimizing the differences between average stock returns and average levered investment returns via GMM. Our model captures well the average returns of portfolios sorted on capital investment and on size and book-to-market, including the small-stock value premium. Our model is also partially successful in capturing the post-earnings-announcement drift and its higher magnitude in small firms.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13024.

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Date of creation: Apr 2007
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Handle: RePEc:nbr:nberwo:13024

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Cited by:
  1. Xiaoji Lin, 2009. "Endogenous Technological Progress and the Cross Section of Stock Returns," FMG Discussion Papers, Financial Markets Group dp634, Financial Markets Group.
  2. Long Chen & Lu Zhang, 2007. "Neoclassical Factors," NBER Working Papers 13282, National Bureau of Economic Research, Inc.

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