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The Role of Limits to Arbitrage and the Asset Growth Anomaly

61 Pages Posted: 17 Mar 2009 Last revised: 17 Sep 2017

F.Y. Eric C. Lam

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences

K.C. John Wei

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

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Date Written: January 1, 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).

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

JEL Classification: G14, G31, M41, M42

Suggested Citation

Lam, F.Y. Eric C. and Wei, K.C. John, The Role of Limits to Arbitrage and the Asset Growth Anomaly (January 1, 2010). Available at SSRN: https://ssrn.com/abstract=1360680 or http://dx.doi.org/10.2139/ssrn.1360680

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)

Kuo-Chiang (John) Wei

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

School of Accounting and Finance
Hong Kong Polytechnic University
Hung Hom, Kowloon
Hong Kong
852 2766 4953 (Phone)
852 2330 9845 (Fax)

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