Heterogeneous Beliefs, Investor Holding Horizon and the Neoclassical Q-Theory of Investment

35 Pages Posted: 13 Aug 2012

Date Written: August 10, 2012

Abstract

This paper studies how the negative relation between expected return and real investment derived from the neoclassical q-theory changes with the degree of mispricing and investor holding horizon. Using analyst forecast dispersion as a proxy for overpricing generated by heterogeneous beliefs and institutional holdings as a proxy for investor holding horizon, I show that: (i) when investors have short holding horizon, the negative return-investment relation predicted by the standard q-theory continues to hold under overpricing; (ii) when there is no mispricing, investor holding horizon does not affect the return-investment relation; and (iii) when there is a high degree of mispricing, the existence of long-term investors significantly weakens the negative relation between expected return and investment, providing evidence that long-term investors prevent firm investment from co-moving with speculative components in asset prices. The empirical results cannot be fully explained by alternative explanations, such as limits-to-arbitrage and a simple q-theory with investment frictions.

Keywords: Q-theory of investment, Investment-related asset pricing anomalies, Heterogeneous beliefs, Investor holding horizon

JEL Classification: G1, E2

Suggested Citation

Wang, Shujing, Heterogeneous Beliefs, Investor Holding Horizon and the Neoclassical Q-Theory of Investment (August 10, 2012). Available at SSRN: https://ssrn.com/abstract=2126867 or http://dx.doi.org/10.2139/ssrn.2126867

Shujing Wang (Contact Author)

Tongji University ( email )

Shanghai
China

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