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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

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.

Suggested Citation

  • Li, Dongmei & Zhang, Lu, 2010. "Does q-theory with investment frictions explain anomalies in the cross section of returns?," Journal of Financial Economics, Elsevier, vol. 98(2), pages 297-314, November.
    • Handle: RePEc:eee:jfinec:v:98:y:2010:i:2:p:297-314
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