Does Q-Theory with Investment Frictions Explain Anomalies in the Cross-Section of Returns?

43 Pages Posted: 20 Feb 2010

See all articles by Dongmei Li

Dongmei Li

University of South Carolina - Darla Moore School of Business - Department of Finance

Lu Zhang, 张橹

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

Date Written: January 1, 2010

Abstract

Q-theory predicts that investment frictions steepen the relation between expected returns and firm investment. Using financing constraints to proxy for investment frictions, we document only weak evidence that the investment-to-assets and asset growth effects in the cross-section of returns are stronger in financially more constrained firms than in financially less constrained firms. There is no evidence that q-theory with investment frictions explains the investment growth, net stock issues, abnormal corporate investment, or net operating assets anomalies. Limits-to-arbitrage proxies dominate q-theory with investment frictions in explaining the magnitude of the investment-to-assets and asset growth anomalies in direct comparisons.

Keywords: q-theory, investment frictions, asset pricing anomalies, limits to arbitrage

JEL Classification: E22, E44, G12, G14, G31, G32

Suggested Citation

Li, Dongmei and Zhang, Lu, Does Q-Theory with Investment Frictions Explain Anomalies in the Cross-Section of Returns? (January 1, 2010). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1555345

Dongmei Li

University of South Carolina - Darla Moore School of Business - Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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