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

  • Lam, F.Y. Eric C.
  • Wei, K.C. John
Registered author(s):

    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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    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
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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