Working Paper: NBER ID: w11322
Authors: Lu Zhang
Abstract: I construct a neoclassical, Q-theoretical foundation for time-varying expected returns in connection with corporate policies and events. Under certain conditions, stock return equals investment return, which is directly tied with firm characteristics. This single equation is shown analytically to be qualitatively consistent with many anomalies, including the relations of future stock returns with market-to-book, investment and disinvestment rates, seasoned equity offerings, tender offers and stock repurchases, dividend omissions and initiations, expected profitability, profitability, and more important, earnings announcement. The Q-framework also provides a new asset pricing test.
Keywords: No keywords provided
JEL Codes: D21; D92; E22; E44; G12; G14; G31; G32; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| investment-to-asset ratio (G31) | future returns (G17) |
| disinvestment-to-asset ratio (G32) | future returns (G17) |
| market-to-book ratios (G32) | average returns (G12) |
| stock repurchases or dividend initiations (G35) | long-term abnormal returns (G40) |
| seasoned equity offerings (SEO) (G24) | lower average returns (G19) |
| expected profitability (L21) | expected returns (G17) |
| profitability (L21) | average returns (G12) |