The Role of Limits to Arbitrage and the Asset Growth Anomaly

61 Pages Posted: 17 Mar 2009 Last revised: 11 Jan 2019

See all articles by FY Eric Lam

FY Eric Lam

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

K.C. John Wei

Hong Kong Polytechnic University

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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, Full Yet Eric Campbell and Wei, Kuo-Chiang (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 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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