The Investment-Return Relation

51 Pages Posted: 2 May 2019 Last revised: 14 Sep 2019

See all articles by Claire Yurong Hong

Claire Yurong Hong

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Baolian Wang

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: September 12, 2019

Abstract

The q-theory of asset pricing predicts a negative relation between a firm’s investment and its future stock returns, and the negative relation is stronger among firms with higher investment frictions. These predictions arise from each firm’s decision. Therefore, testing it does not require that the amount of investment be in investors’ information set, and skipping between the investment and future stock returns is unnecessary. We document a positive relation between a firm’s investment and its immediate future stock returns. This positive relation, in most empirical specifications, fully subsumes the traditionally documented negative investment-return relation that starts several quarters after investment. After considering immediate future returns, the investment-return relation is more positive among firms with higher investment frictions. These findings challenge the q-theory based interpretation of the investment-return relation.

Keywords: q-factor model; q theory; investment CAPM; asset pricing; stock returns; cross section

JEL Classification: G12; G41; G14

Suggested Citation

Hong, Claire Yurong and Wang, Baolian, The Investment-Return Relation (September 12, 2019). Available at SSRN: https://ssrn.com/abstract=3364066 or http://dx.doi.org/10.2139/ssrn.3364066

Claire Yurong Hong

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

211 West Huaihai Road
Shanghai, China
Shanghai, Shanghai 200030
China

HOME PAGE: http://https://sites.google.com/site/claireyuronghong/

Baolian Wang (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

314 Stuzin Hall
Gainesville, FL 32611
United States

HOME PAGE: http://www.wangbaolian.com

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