Asset Growth Effect and Q Theory of Investment

40 Pages Posted: 4 Dec 2020

See all articles by Leonid Kogan

Leonid Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Jun Li

University of Texas at Dallas

Xiaotuo Qiao

Harbin Institute of Technology - School of Management

Date Written: November 20, 2020

Abstract

We extend the standard q theory of investment into a two-capital setup in which firms use both physical capital (long-term asset) and short-term capital (current asset) as production inputs. We find this simple extension is capable of explaining the stronger return predictive power of total asset growth than current and long-term asset growths. A novel asset imbalance channel creates negatively correlated comovement between current and long-term asset growths that are unrelated to the discount rate effect. Part of this comovement is cancelled out in the total asset growth, giving rise to its stronger return predictive power. Empirically, once controlling for this comovement, the return predictive power of current and long-term asset growths substantially improves. Furthermore, we document compelling evidences for the model's prediction that the asset growth effects are more prominent among firms with low asset imbalance. Our results support the q-theory based explanation for the asset growth effect.

Keywords: Asset growth effect, asset imbalance, q theory of investment

JEL Classification: G12

Suggested Citation

Kogan, Leonid and Li, Jun and Qiao, Xiaotuo, Asset Growth Effect and Q Theory of Investment (November 20, 2020). Available at SSRN: https://ssrn.com/abstract=3734333 or http://dx.doi.org/10.2139/ssrn.3734333

Leonid Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER)

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Jun Li (Contact Author)

University of Texas at Dallas ( email )

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Xiaotuo Qiao

Harbin Institute of Technology - School of Management ( email )

Harbin
China

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