Journal Article

Anomalies

Erica X. N. Li, Dmitry Livdan and Lu Zhang

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 22, issue 11, pages 4301-4334
Published in print November 2009 | ISSN: 0893-9454
Published online April 2009 | e-ISSN: 1465-7368 | DOI: https://dx.doi.org/10.1093/rfs/hhp023
Anomalies

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  • Production and Organizations
  • Intertemporal Choice and Growth
  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment
  • Money and Interest Rates
  • Economics
  • Corporate Governance

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We take a simple q-theory model and ask how well it can explain external financing anomalies, both qualitatively and quantitatively. Our central insight is that optimal investment is an important driving force of these anomalies. The model simultaneously reproduces procyclical equity issuance waves, the negative relation between investment and average returns, long-term underperformance following equity issues, positive long-term drift following cash distributions, the mean-reverting operating performance of issuing and cash-distributing firms, and the failure of the CAPM in explaining the long-term stock-price drifts. However, the model cannot fully capture the magnitude of the positive drift following cash distributions observed in the data.

Keywords: D21; D92; E22; E44; G12; G14; G31; G32; G35

Journal Article.  14635 words.  Illustrated.

Subjects: Production and Organizations ; Intertemporal Choice and Growth ; Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; Money and Interest Rates ; Economics ; Corporate Governance

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