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

Dongmei Li and Lu Zhang ()

Journal of Financial Economics, 2010, vol. 98, issue 2, pages 297-314

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.

Keywords: Investment-based; asset; pricing; Asset; pricing; anomalies; Investment; frictions; The; discount; rate; Financing; constraints (search for similar items in EconPapers)
Date: 2010
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Persistent link: http://EconPapers.repec.org/RePEc:eee:jfinec:v:98:y:2010:i:2:p:297-314

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