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

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

130 Scopus Citations
View graph of relations

Author(s)

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

Related Research Unit(s)

Detail(s)

Original languageEnglish
Pages (from-to)127-149
Journal / PublicationJournal of Financial Economics
Volume102
Issue number1
Publication statusPublished - Oct 2011

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. © 2011 Elsevier B.V.

Research Area(s)

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

Citation Format(s)

Limits-to-arbitrage, investment frictions, and the asset growth anomaly. / Lam, F.Y. Eric C.; Wei, K.C. John.

In: Journal of Financial Economics, Vol. 102, No. 1, 10.2011, p. 127-149.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review