Regularities

59 Pages Posted: 21 Mar 2006

See all articles by Laura Xiaolei Liu

Laura Xiaolei Liu

Guanghua School of Management, Peking University

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Lu Zhang, 张橹

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

Multiple version iconThere are 2 versions of this paper

Date Written: August 2006

Abstract

The neoclassical q-theory is a good start to understand the cross section of returns. Under constant return to scale, stock returns equal levered investment returns that are tied directly with characteristics. This equation generates the relations of average returns with book-to-market, investment, and earnings surprises. We estimate the model by minimizing the differences between average stock returns and average levered investment returns via GMM. Our model captures well the average returns of portfolios sorted on capital investment and on size and book-to-market, including the small-stock value premium. Our model is also partially successful in capturing the post-earnings-announcement drift and its higher magnitude in small firms.

Keywords: Anomalies, Tobin's Q, time-varying expected returns, rational expectations

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

Suggested Citation

Liu, Laura Xiaolei and Whited, Toni M. and Zhang, Lu, Regularities (August 2006). AFA 2007 Chicago Meetings Paper; Ross School of Business Paper No. 1071. Available at SSRN: https://ssrn.com/abstract=891721 or http://dx.doi.org/10.2139/ssrn.891721

Laura Xiaolei Liu

Guanghua School of Management, Peking University ( email )

Peking University
Beijing, Beijing 100871
China

HOME PAGE: http://www.pku.edu.lauraliu.cn/en-home.html

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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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