Returns to Scale and Asset Prices

20 Pages Posted: 27 May 2020

See all articles by Hung‐Kun Chen

Hung‐Kun Chen

Tamkang University

Konan Chan

National Chengchi Unversity (NCCU) - Finance

Yanzhi Wang

National Taiwan University - Department of Finance

Date Written: October/November 2019

Abstract

The q‐theory of investment is proposed to explain firm growth effects, where previous papers identify a negative effect of firm growth, including asset growth, real investment and net share issuance, on future stock returns. This paper uses returns to scale from the production function to test the dynamic q‐theory, which predicts that the firm growth effect is theoretically weaker for firms with decreasing returns to scale (DRS) than for non‐DRS firms. Our empirical results generally support the prediction of dynamic q‐theory. However, we find that the dynamic q‐theory explains little of the value, momentum and ROE effects from the standpoint of returns to scale.

Keywords: asset growth, investment, net share issuance, q‐theory, returns to scale

JEL Classification: G12, G14

Suggested Citation

Chen, Hung‐Kun and Chan, Konan and Wang, Yanzhi, Returns to Scale and Asset Prices (October/November 2019). Journal of Business Finance & Accounting, Vol. 46, Issue 9-10, pp. 1299-1318, 2019, Available at SSRN: https://ssrn.com/abstract=3604495 or http://dx.doi.org/10.1111/jbfa.12408

Hung‐Kun Chen (Contact Author)

Tamkang University

No.151, Yingzhuan Rd
Taiwan, 25137
China

Konan Chan

National Chengchi Unversity (NCCU) - Finance ( email )

No. 64, Chih-Nan Road
Section 2
Taipei, 11623
Taiwan
+886-2-29393091 ext 81239 (Phone)

Yanzhi Wang

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

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