An Augmented q-Factor Model with Expected Growth*

Abnormal returns to a fundamental analysis strategy

Kewei Hou, Haitao Mo, Chen Xue and Lu Zhang

Review of Finance, 2021, vol. 25, issue 1, 1-41

Abstract: In the investment theory, firms with high expected investment growth earn higher expected returns than firms with low expected investment growth, holding investment and expected profitability constant. Building on cross-sectional growth forecasts with Tobin’s q, operating cash flows, and change in return on equity as predictors, an expected growth factor earns an average premium of 0.84% per month (t = 10.27) in the 1967–2018 sample. The q5 model, which augments the Hou–Xue–Zhang (2015, Rev. Finan. Stud., 28, 650–705) q-factor model with the expected growth factor, shows strong explanatory power in the cross-section and outperforms the Fama–French (2018, J. Finan. Econom., 128, 234–252) six-factor model.

Keywords: Expected growth; The q-factor model; Investment theory; Anomalies; Efficient markets (search for similar items in EconPapers)
JEL-codes: G12 G14 M41 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (56)

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