Working Paper: NBER ID: w13024
Authors: Laura X. L. Liu; Toni Whited; Lu Zhang
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: neoclassical q-theory; asset pricing anomalies; expected returns; firm characteristics
JEL Codes: E13; E22; E44; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| investment-to-assets ratio (G31) | average returns (G12) |
| book-to-market ratios (G32) | average returns (G12) |
| high investment (G31) | lower expected returns (G19) |
| positive earnings surprises (G14) | higher average returns (G11) |
| negative earnings surprises (G14) | lower average returns (G19) |
| value stocks (G12) | higher average returns (G11) |
| growth stocks (G31) | lower average returns (G19) |