The Q-theory Explanation for the External Financing Effect: New Evidence

Posted: 17 Mar 2009 Last revised: 9 Mar 2016

See all articles by Yuan Huang

Yuan Huang

Hong Kong Polytechnic University - School of Accounting and Finance

FY Eric Lam

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

K.C. John Wei

Hong Kong Polytechnic University

Date Written: 2014

Abstract

Several studies document a robust negative association between net external financing and average stock returns, which is referred to as the external financing effect. Using total asset growth as a comprehensive measure of overall corporate investment and total profitability gross of R&D expenditures as a measure of true economic profitability, we provide new evidence in support of the q-theory explanation for the external financing effect. We also test the market timing explanation for the external financing effectbut fail to document supportive evidence.

Keywords: Cross-section of stock returns, External financing, Total profitability, q-theory of investment, R&D, Total asset growth

JEL Classification: G14, G31, G32, M41, M42

Suggested Citation

Huang, Yuan and Lam, Full Yet Eric Campbell and Wei, Kuo-Chiang (John), The Q-theory Explanation for the External Financing Effect: New Evidence (2014). Journal of Banking & Finance 49 (2014) 69-81, Available at SSRN: https://ssrn.com/abstract=1360677 or http://dx.doi.org/10.2139/ssrn.1360677

Yuan Huang

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Full Yet Eric Campbell Lam (Contact Author)

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

55/F, Two International Finance Centre,
8 Finance Street, Central
Hong Kong
China

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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