RFS Advance Access originally published online on April 1, 2009
Review of Financial Studies 2009 22(11):4301-4334; doi:10.1093/rfs/hhp023
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Anomalies
University of Michigan
University of California, Berkeley
University of Michigan and National Bureau of Economic Research
Send correspondence to Lu Zhang, Finance Department, Stephen M. Ross School of Business, University of Michigan, 701 Tappan, R 4336, Ann Arbor, MI 48109-1234, telephone: (734) 615-4854, fax: (734) 936-0282. E-mail: zhanglu{at}bus.umich.edu.
JEL Classification: D21, D92, E22, E44, G12, G14, G31, G32, G35
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Abstract |
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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.
We acknowledge helpful comments from Malcolm Baker, Mike Barclay, Nick Barberis, Jonathan Berk, Mark Bils, Robert Bloomfield, Jim Booth, Peter Bossaerts, John Campbell, Murray Carlson, V. V. Chari, Jason Chen, John Cochrane, Martijn Cremers, Murray Frank, Will Goetzmann, Bob Goldstein, Joao Gomes, Jeremy Greenwood, John Heaton, Christopher Hennessy, Zvi Hercowitz, Patrick Kehoe, Narayana Kocherlakota, Leonid Kogan, Pete Kyle, Owen Lamont, John Long, Sydney Ludvigson, Ellen McGrattan, Lionel McKenzie, Roni Michaely, Stefan Nagel, Martin Schneider, Bill Schwert, Jeremy Stein, Hans Stoll, Jerry Warner, David Weinbaum, Yuhang Xing, Amir Yaron, and other seminar participants at Arizona State University, Cornell University, Ohio State University, MIT, University of California at Berkeley, University of Colorado at Boulder, University of Minnesota, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of St. Louis, University of North Carolina at Chapel Hill, University of Rochester (Economics Department and Simon School of Business), University of Wisconsin at Madison, Vanderbilt University, Yale School of Management, NBER Asset Pricing meetings, and Utah Winter Finance Conference. We are particularly grateful to Matt Spiegel (the editor) and three anonymous referees for extensive and insightful comments. This paper supersedes two previous working papers titled "Anomalies" (NBER Working Paper #11322 by Lu Zhang) and "Optimal Market Timing" (NBER Working Paper #12014 by Erica X. N. Li, Dmitry Livdan, and Lu Zhang).