An Augmented q-Factor Model with Expected Growth* | Zendy

Kewei Hou | Zendy; Haitao Mo | Zendy; Xue Chen | Zendy; Lu Zhang | Zendy

AI Assistant Blog Pricing

Home ZAIA Blog

Open Access

An Augmented q-Factor Model with Expected Growth*

Author(s) -

Kewei Hou,

Haitao Mo,

Xue Chen,

Lu Zhang

Publication year - 2020

Publication title -

review of finance

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.933

H-Index - 61

eISSN - 1875-824X

pISSN - 1572-3097

DOI - 10.1093/rof/rfaa004

Subject(s) - economics , profitability index , investment (military) , explanatory power , equity (law) , econometrics , growth model , tobin's q , monetary economics , microeconomics , finance , philosophy , epistemology , politics , political science , law

In the investment theory, firms with high expected investment growth earn higher expected returns than firms with low expected investment growth, holding investment and expected profitability constant. Building on cross-sectional growth forecasts with Tobin’s q, operating cash flows, and change in return on equity as predictors, an expected growth factor earns an average premium of 0.84% per month (t = 10.27) in the 1967–2018 sample. The q5 model, which augments the Hou-Xue-Zhang (2015) q-factor model with the expected growth factor, shows strong explanatory power in the cross section and outperforms the Fama-French (2018) 6-factor model.

The content you want is available to Zendy users.

Already have an account? Click here to sign in.

Having issues? You can contact us here

Accelerating Research