An Augmented q-Factor Model with Expected Growth
Review of Finance, Forthcoming
54 Pages Posted: 19 Mar 2020
Date Written: January 27, 2020
In the investment theory, firms with high expected investment growth earn higher expected returns than firms with low expected investment growth, holding investment and expected profitability constant. Building on cross-sectional growth forecasts with Tobin’s q, operating cash flows, and change in return on equity as predictors, an expected growth factor earns an average premium of 0.84% per month (t = 10.27) in the 1967–2018 sample. The q5 model, which augments the Hou-Xue-Zhang (2015) q-factor model with the expected growth factor, shows strong explanatory power in the cross section and outperforms the Fama-French (2018) 6-factor model.
Keywords: The expected growth factor, factor models, the q5 model, the investment theory
JEL Classification: G12, G14
Suggested Citation: Suggested Citation