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

  • Li, Dongmei
  • Zhang, Lu

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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File URL: http://www.sciencedirect.com/science/article/pii/S0304-405X(10)00150-9
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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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