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http://ssrn.com/abstract=1360680
 
 

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The Role of Limits to Arbitrage and the Asset Growth Anomaly


F.Y. Eric C. Lam


Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences; Hong Kong University of Science & Technology - Department of Finance

K. C. John Wei


Hong Kong University of Science & Technology (HKUST) - Department of Finance

January 2010


Abstract:     
In this paper, we hypothesize that if the negative relationship between asset growth and stock returns is due to mispricing, it should be more pronounced and more persistent when there are more severe limits to arbitrage. The empirical evidence supports our hypothesis. Our findings are not due to conventional risks, firm characteristics, equity issuance, or idiosyncratic risk. In addition, the role of limits to arbitrage in the asset growth anomaly is not a manifestation of liquidity risk and is not simply ex-post justified by trading expenses. Our results appear to support the limits-to-arbitrage argument proposed by Shleifer and Vishny (1997).

Number of Pages in PDF File: 61

Keywords: Asset growth, Capital investment, Cross-section of stock returns, Limits to arbitrage

JEL Classification: G14, G31, M41, M42

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Date posted: March 17, 2009 ; Last revised: April 9, 2011

Suggested Citation

Lam, F.Y. Eric C. and Wei, K. C. John, The Role of Limits to Arbitrage and the Asset Growth Anomaly (January 2010). Available at SSRN: http://ssrn.com/abstract=1360680 or http://dx.doi.org/10.2139/ssrn.1360680

Contact Information

Full Yet Eric Campbell Lam (Contact Author)
Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences ( email )
Kowloon Tong, Kowloon
Hong Kong
3411-5218 (Phone)
3411-5585 (Fax)
Hong Kong University of Science & Technology - Department of Finance ( email )
Clear Water Bay, Kowloon
Hong Kong
Kuo-Chiang Wei
Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )
Clear Water Bay, Kowloon
Hong Kong
852 358 7676 (Phone)
852 358 1749 (Fax)
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