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Revisiting the investment anomaly: Financing constraints or limits‐to‐arbitrage?

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  • Kyungyeon (Rachel) Koh

Abstract

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.

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  • Kyungyeon (Rachel) Koh, 2020. "Revisiting the investment anomaly: Financing constraints or limits‐to‐arbitrage?," Review of Financial Economics, John Wiley & Sons, vol. 38(4), pages 655-673, October.
    • Handle: RePEc:wly:revfec:v:38:y:2020:i:4:p:655-673
    DOI: 10.1002/rfe.1098
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