Limits-to-Arbitrage, Investment Frictions, and the Asset Growth Anomaly
Posted: 10 Apr 2011 Last revised: 11 Jan 2019
Date Written: 2011
Abstract
We empirically evaluate the predictions of the mispricing hypothesis with limits-to-arbitrage suggested by Shleifer and Vishny (1997) and the q-theory with investment frictions proposed by Li and Zhang (2010) on the negative relation between asset growth and average stock returns. We conduct cross-sectional regressions of returns on asset growth on subsamples split by a given measure of limits-to-arbitrage or investment frictions. We show that: (i) proxies for limits-to-arbitrage and proxies for investment frictions are often highly correlated; (ii) the evidence based on equal-weighted returns shows significant support for both hypotheses, while the evidence from value-weighted returns is weaker; and (iii) in direct comparisons, each hypothesis is supported by a fair and similar amount of evidence.
Keywords: Asset growth, Capital investment, Stock returns, Investment frictions, Limits-to-arbitrage
JEL Classification: G14, G31, M41, M42
Suggested Citation: Suggested Citation
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