Laura Xiaolei Liu
Hong Kong University of Science & Technology
Toni M. Whited
University of Rochester - Simon Graduate School of Business
Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)
AFA 2007 Chicago Meetings Paper
Ross School of Business Paper No. 1071
The neoclassical q-theory is a good start to understand the cross section of returns. Under constant return to scale, stock returns equal levered investment returns that are tied directly with characteristics. This equation generates the relations of average returns with book-to-market, investment, and earnings surprises. We estimate the model by minimizing the differences between average stock returns and average levered investment returns via GMM. Our model captures well the average returns of portfolios sorted on capital investment and on size and book-to-market, including the small-stock value premium. Our model is also partially successful in capturing the post-earnings-announcement drift and its higher magnitude in small firms.
Number of Pages in PDF File: 59
Keywords: Anomalies, Tobin's Q, time-varying expected returns, rational expectations
JEL Classification: D21, D92, E22, E44, G12, G14, G31, G32, G35working papers series
Date posted: March 21, 2006
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