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Revisiting the investment anomaly: Financing constraints or limits‐to‐arbitrage?
Author(s) -
Koh Kyungyeon Rachel
Publication year - 2020
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1002/rfe.1098
Subject(s) - arbitrage , predictability , limits to arbitrage , anomaly (physics) , economics , stock (firearms) , financial economics , context (archaeology) , statistical arbitrage , risk arbitrage , investment (military) , monetary economics , econometrics , arbitrage pricing theory , capital asset pricing model , mathematics , physics , politics , political science , law , condensed matter physics , mechanical engineering , paleontology , statistics , engineering , biology
The investment anomaly refers to the pervasive negative predictability in future stock returns following large firm investments. I re‐investigate two competing hypotheses for the potential source of the anomaly: (a) prolonged mispricing due to limits to arbitrage and (b) financing constraints in the context of Q‐theory of investments. The analyses employ new proxies for financing constraints, the text‐based measures developed by Hoberg and Maksimovic (2014). While the evidence supporting the limits‐to‐arbitrage hypothesis is stronger, there is a fair amount of evidence that financing constraints also reinforce the anomaly effect.