Abstract

https://ssrn.com/abstract=2683926
 


 



Dynamic Q-Theory with Agency Investment Frictions and Cross-Sectional Stock Returns


Lei Mao


University of Warwick - Finance Group

Mike Qinghao Mao


Erasmus University Rotterdam

K. C. John Wei


Hong Kong University of Science & Technology (HKUST)

December 1, 2015

WBS Finance Group Research Paper No. 0001

Abstract:     
We investigate the impact of managerial investment diversion on a firm’s investment paths and the investment-return relation in a dynamic q-theory model. When efficiency of investment is not observed by shareholders, the manager may divert investment for private benefits. An agency investment friction emerges from the cost associated with high-powered managerial compensations to prevent the investment diversion. The state-dependency of agency investment frictions predicts cross-sectional variations in the relation between investment and subsequent stock returns. Our empirical results are consistent with the model predictions and suggest that managerial agency costs influence investment levels and stock returns across U.S. firms.

Number of Pages in PDF File: 51

Keywords: Dynamic agency, Q-theory of investment, Cross-section of stock returns

JEL Classification: G12; G14; G34; D82


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Date posted: December 3, 2015 ; Last revised: January 26, 2016

Suggested Citation

Mao, Lei and Mao, Mike Qinghao and Wei, K. C. John, Dynamic Q-Theory with Agency Investment Frictions and Cross-Sectional Stock Returns (December 1, 2015). WBS Finance Group Research Paper No. 0001. Available at SSRN: https://ssrn.com/abstract=2683926

Contact Information

Lei Mao (Contact Author)
University of Warwick - Finance Group ( email )
Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain
Mike Qinghao Mao
Erasmus University Rotterdam ( email )
Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands
+31104081322 (Phone)
K.C. John Wei
Hong Kong University of Science & Technology (HKUST)
Clearwater Bay
Kowloon
Hong Kong
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