Anomalies

Li, Erica X. N.; Livdan, Dmitry; Zhang, Lu

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Anomalies

Review of Financial Studies, Forthcoming

60 Pages Posted: 10 Jul 2008

See all articles by Erica X. N. Li

Erica X. N. Li

University of Michigan, Stephen M. Ross School of Business

Lu Zhang

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

There are 4 versions of this paper

Date Written: July 10, 2008

Abstract

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.

Keywords: Anomalies, the q-theory, optimal investment, time-varying expected return, rational expectations economics

JEL Classification: D21, D92, E22, E44, G12, G14, G31, G32, G35

Suggested Citation: Suggested Citation

Li, Erica X. N. and Livdan, Dmitry and Zhang, Lu, Anomalies (July 10, 2008). Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1157699