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RegularitiesLaura Xiaolei LiuHong Kong University of Science & Technology Toni M. WhitedUniversity of Rochester - Simon Graduate School of Business Lu ZhangOhio State University - Fisher College of Business; National Bureau of Economic Research (NBER) August 2006 AFA 2007 Chicago Meetings Paper Ross School of Business Paper No. 1071 Abstract: 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, G35 working papers seriesDate posted: March 21, 2006Suggested CitationContact Information
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