Limits-to-arbitrage, investment frictions, and the asset growth anomaly

F.Y. Eric C. Lam and K.C. John Wei

Journal of Financial Economics, 2011, vol. 102, issue 1, 127-149

Abstract: We empirically evaluate the predictions of the mispricing hypothesis with limits-to-arbitrage suggested by Shleifer and Vishny (1997) and the q-theory with investment frictions proposed by Li and Zhang (2010) on the negative relation between asset growth and average stock returns. We conduct cross-sectional regressions of returns on asset growth on subsamples split by a given measure of limits-to-arbitrage or investment frictions. We show that: (i) proxies for limits-to-arbitrage and proxies for investment frictions are often highly correlated; (ii) the evidence based on equal-weighted returns shows significant support for both hypotheses, while the evidence from value-weighted returns is weaker; and (iii) in direct comparisons, each hypothesis is supported by a fair and similar amount of evidence.

Keywords: Asset; growth; Capital; investment; Stock; returns; Investment; frictions; Limits-to-arbitrage (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (75)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:102:y:2011:i:1:p:127-149

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