Does q-theory with investment frictions explain anomalies in the cross section of returns? |
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Authors: | Dongmei Li Lu Zhang |
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Institution: | 1. Rady School of Management, University of California, San Diego, USA;2. Stephen M. Ross School of Business, University of Michigan and NBER, USA |
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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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Keywords: | Investment-based asset pricing Asset pricing anomalies Investment frictions The discount rate Financing constraints |
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