The Role of Limits to Arbitrage and the Asset Growth Anomaly
61 Pages Posted: 17 Mar 2009 Last revised: 17 Sep 2017
Date Written: January 1, 2010
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: Suggested Citation