Anomalies

44 Pages Posted: 1 Nov 2006

See all articles by Erica X. N. Li

Erica X. N. Li

Cheung Kong Graduate School of Business

Dmitry Livdan

University of California, Berkeley

Lu Zhang, 张橹

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: February 2007

Abstract

The q-theory implies that investment is a first-order determinant of the cross section of expected returns, and that optimal investment drives the external financing anomalies. Our neoclassical model simultaneously and in many cases quantitatively reproduces: Procyclical equity issuance waves; stock market predictability with the new equity share; the negative relation between investment and average returns; long-term underperformance following equity issuance; the mean-reverting operating performance of issuing and cash-distributing firms; and the positive long-term drift following cash distribution and its positive relation with book-to-market. Our model also generates the failures of the CAPM in capturing these anomalies.

Keywords: Anomalies, Tobin's Q, time-varying expected return, rational expectations, behavioral finance

JEL Classification: D21, D92, E22, E44, G12, G14, G31, G32, G35

Suggested Citation

Li, Erica X. N. and Livdan, Dmitry and Zhang, Lu, Anomalies (February 2007). Simon School Working Paper No. 04-16; Fifteenth Annual Utah Winter Finance Conference . Available at SSRN: https://ssrn.com/abstract=587161 or http://dx.doi.org/10.2139/ssrn.587161

Erica X. N. Li

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Dmitry Livdan

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 642-4733 (Phone)

Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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