Limits-to-arbitrage, investment frictions, and the asset growth anomaly

F. Y.Eric C. Lam, K. C.John Wei

Research output: Journal article publicationJournal articleAcademic researchpeer-review

85 Citations (Scopus)

Abstract

We empirically evaluate the predictions of the mispricing hypothesis with limits-to-arbitrage suggested by Shleifer and Vishny (1997) and the q-theory with investment frictions proposed by Li and Zhang (2010) on the negative relation between asset growth and average stock returns. We conduct cross-sectional regressions of returns on asset growth on subsamples split by a given measure of limits-to-arbitrage or investment frictions. We show that: (i) proxies for limits-to-arbitrage and proxies for investment frictions are often highly correlated; (ii) the evidence based on equal-weighted returns shows significant support for both hypotheses, while the evidence from value-weighted returns is weaker; and (iii) in direct comparisons, each hypothesis is supported by a fair and similar amount of evidence.

Original languageEnglish
Pages (from-to)127-149
Number of pages23
JournalJournal of Financial Economics
Volume102
Issue number1
DOIs
Publication statusPublished - 1 Oct 2011
Externally publishedYes

Keywords

  • Asset growth
  • Capital investment
  • Investment frictions
  • Limits-to-arbitrage
  • Stock returns

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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