An empirical q-factor model consisting of the market factor, a size factor, an investment factor, and a profitability factor largely summarizes the cross section of average stock returns. A comprehensive examination of nearly 80 anomalies reveals that about one-half of the anomalies are insignificant in the broad cross section. More importantly, with a few exceptions, the q-factor model's performance is at least comparable to, and in many cases better than that of the Fama-French (1993) 3-factor model and the Carhart (1997) 4-factor model in capturing the remaining significant anomalies.

/pdf/digesting-anomalies-an-investment-approach-3oub45mmsf.pdf

Digesting Anomalies: An Investment Approach

Motivated from investment-based asset pricing, we propose a new factor model that consists of the market factor, a size factor, an investment factor, and a return-on-equity factor The new model [i] outperforms the Carhart (1997) four-factor model in pricing portfolios formed on earnings surprise, idiosyncratic volatility, financial distress, equity issues, as well as on investment and return-on-equity; [ii] performs similarly as the Carhart model in pricing portfolios on momentum as well as on size and book-to-market; but [iii] underperforms in pricing the total accrual deciles Our model's performance, combined with its clear economic intuition, suggests that it can serve as a new workhorse model for academic research and investment management practice

We test for firm-level asset investment effects in returns by examining the crosssectional relation between firm asset growth and subsequent stock returns. Asset growth rates are strong predictors of future abnormal returns. Asset growth retains its forecasting ability even on large capitalization stocks. When we compare asset growth rates with the previously documented determinants of the cross-section of returns (i.e., book-to-market ratios, firm capitalization, lagged returns, accruals, and other growth measures), we find that a firm’s annual asset growth rate emerges as an economically and statistically significant predictor of the cross-section of U.S. stock returns. ONE OF THE PRIMARY FUNCTIONS OF CAPITAL MARKETS is the efficient pricing of real investment. As companies acquire and dispose of assets, economic efficiency demands that the market appropriately capitalizes such transactions. Yet, growing evidence identifies an important bias in the market’s capitalization of corporate asset investment and disinvestment. The findings suggest that corporate events associated with asset expansion (i.e., acquisitions, public equity offerings, public debt offerings, and bank loan initiations) tend to be followed by periods of abnormally low returns, whereas events associated with asset contraction (i.e., spinoffs, share repurchases, debt prepayments, and dividend initiations) tend to be followed by periods of abnormally high returns. 1 In

https://www.krannert.purdue.edu/faculty/hgulen/asset_growth.pdf

Asset Growth and the Cross-Section of Stock Returns

We test for firm-level asset investment effects in returns by examining the cross-sectional relation between firm asset growth and subsequent stock returns. As a test variable, we use the year-on-year percentage change in total assets. Asset growth rates are strong predictors of future abnormal returns. Asset growth retains its forecasting ability even on large capitalization stocks, a subgroup of firms for which other documented predictors of the cross-section lose much of their predictive ability. When we compare asset growth rates with the previously documented determinants of the cross-section of returns (i.e., book-to-market ratios, firm capitalization, lagged returns, accruals, and other growth measures), we find that a firm's annual asset growth rate emerges as an economically and statistically significant predictor of the cross-section of U.S. stock returns.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID999706_code162849.pdf?abstractid=760967&rulid=41369&mirid=3

http://rady.ucsd.edu/docs/faculty/Innovative-Efficiency-and-Stock-Returns.pdf

Innovative efficiency and stock returns

An investment factor, long in low-investment stocks and short in high-investment stocks, helps explain the new issues puzzle. Adding the investment factor into standard factor regressions reduces the SEO underperformance by about 75%, the IPO underperformance by 80%, the underperformance following convertible debt offerings by 50%, and Daniel and Titman’s (2006) composite issuance effect by 40%. The reason is that issuers invest more than nonissuers, and the investment factor earns a significantly positive average return of 0.57% per month. Equity and debt issuers underperform matching nonissuers with similar characteristics in the post-issue years (e.g., Ritter, 1991; Loughran and Ritter, 1995; and Spiess and Affleck-Graves, 1995, 1999). We explore empirically the investment-based hypothesis of this underperformance. The q-theory of investment and the real options theory imply a negative relation between real investment and expected returns. If the proceeds from equity and debt issues are used to finance investment, then issuers should invest more and earn lower average returns than matching nonissuers.

The New Issues Puzzle: Testing the Investment-Based Explanation

An investment factor, long in low investment stocks and short in high investment stocks, helps explain the new issues puzzle. Adding this factor into standard factor regressions reduces substantially the magnitude of the underperformance following equity and debt offerings and the composite issuance effect. The reason is that issuers invest more than nonissuers, and the low-minus-high investment factor earns a signiﬁcant average return of 0.57% per month. Our evidence lends support to the real options theory, in which investment extinguishes risky expansion options, and the q-theory of investment, in which ﬁrms with low costs of capital invest more.

Dividend distribution enhances information transmission, and mitigates agency conflicts by restricting managers’ access to free cash flow, and exposing firms to the scrutiny and monitoring by market participants when raising external capital. The reduction in agency costs and improvement in information dissemination reduce the cost of funds, and investment at more competitive cost of capital enhances firm value. For REITs, because of the mandated high dividend distribution, growth depends on the availability of external capital at competitive rates, such that mitigation of agency costs is critical to sustain growth. We examine the relation between dividends and growth with a sample of U.S. equity REITs. Our data reveal a significantly positive relation between externally financed growth and dividend payments. The relation is stronger among REITs with more growth opportunities, and REITs that issue new equity and debt. We interpret this evidence as consistent with the notion that by reducing agency costs and facilitating capital raising, dividends enhance growth.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2279639_code449709.pdf?abstractid=2237572&mirid=1

Agency Cost, Dividend Policy and Growth: The Special Case of REITs

Adding a return factor based on real investment into standard calendar-time regressions makes underperformance following seasoned equity oerings largely insignican t and reduces its magnitude by around 40%. The reason is that issuers invest much more than nonissuers, and the low-minus-high investment-to-asset factor earns a signican t average return of 0.37% per month. Intuitively, controlling for expected protabilit y, rms with lower costs of capital tend to have more positive-NPV projects and invest more. Issuers also have higher leverage ratios and stronger shareholder rights than matching nonissuers, inconsistent with explanations based on leverage and overinvestment.

/pdf/investment-based-underperformance-following-seasoned-equity-4z269y1uc3.pdf

Investment-Based Underperformance Following Seasoned Equity Offerings

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Papers

The New Issues Puzzle: Testing the Investment-Based Explanation

The New Issues Puzzle: Testing the Investment-Based Explanation

Agency Cost, Dividend Policy and Growth: The Special Case of REITs

Agency Cost, Dividend Policy and Growth: The Special Case of REITs

Investment-Based Underperformance Following Seasoned Equity Offerings