Erica X. N. Li
The Stephen M. Ross School of Business at the University of Michigan
University of California, Berkeley
Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)
July 10, 2008
Review of Financial Studies, Forthcoming
We take a simple q-theory model and ask how well it can explain external financing anomalies, both qualitatively and quantitatively. Our central insight is that optimal investment is an important driving force of these anomalies. The model simultaneously reproduces procyclical equity issuance waves, the negative relation between investment and average returns, long-term underperformance following equity issues, positive long-term drift following cash distributions, the mean-reverting operating performance of issuing and cash-distributing firms, and the failure of the CAPM in explaining the long-term stock-price drifts. However, the model cannot fully capture the magnitude of the positive drift following cash distributions observed in the data.
Number of Pages in PDF File: 60
Keywords: Anomalies, the q-theory, optimal investment, time-varying expected return, rational expectations economics
JEL Classification: D21, D92, E22, E44, G12, G14, G31, G32, G35Accepted Paper Series
Date posted: July 10, 2008
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