The q-theory explanation for the external financing effect: New evidence

Yuan Huang; F. Y.Eric C. Lam; K. C. John Wei

doi:10.1016/j.jbankfin.2014.08.010

The q-theory explanation for the external financing effect: New evidence

Yuan Huang
, F. Y.Eric C. Lam
, K. C. John Wei

Research output: Contribution to journal › Article › peer-review

7 Citations (Scopus)

Abstract

Several studies document a robust negative association between net external financing and average stock returns, which is referred to as the external financing effect. Using total asset growth as a comprehensive measure of overall corporate investment and total profitability gross of R&D expenditures as a measure of true economic profitability, we provide new evidence in support of the q-theory explanation for the external financing effect. We also test the market timing explanation for the external financing effect but fail to document supportive evidence.

Original language	English
Pages (from-to)	69-81
Number of pages	13
Journal	Journal of Banking and Finance
Volume	49
DOIs	https://doi.org/10.1016/j.jbankfin.2014.08.010
Publication status	Published - 1 Oct 2014
Externally published	Yes

Keywords

Cross-section of stock returns
External financing
Q-Theory of investment
R&D
Total asset growth
Total profitability

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10.1016/j.jbankfin.2014.08.010

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title = "The q-theory explanation for the external financing effect: New evidence",

abstract = "Several studies document a robust negative association between net external financing and average stock returns, which is referred to as the external financing effect. Using total asset growth as a comprehensive measure of overall corporate investment and total profitability gross of R\&D expenditures as a measure of true economic profitability, we provide new evidence in support of the q-theory explanation for the external financing effect. We also test the market timing explanation for the external financing effect but fail to document supportive evidence.",

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AU - Lam, F. Y.Eric C.

AU - John Wei, K. C.

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N2 - Several studies document a robust negative association between net external financing and average stock returns, which is referred to as the external financing effect. Using total asset growth as a comprehensive measure of overall corporate investment and total profitability gross of R&D expenditures as a measure of true economic profitability, we provide new evidence in support of the q-theory explanation for the external financing effect. We also test the market timing explanation for the external financing effect but fail to document supportive evidence.

AB - Several studies document a robust negative association between net external financing and average stock returns, which is referred to as the external financing effect. Using total asset growth as a comprehensive measure of overall corporate investment and total profitability gross of R&D expenditures as a measure of true economic profitability, we provide new evidence in support of the q-theory explanation for the external financing effect. We also test the market timing explanation for the external financing effect but fail to document supportive evidence.

KW - Cross-section of stock returns

KW - External financing

KW - Q-Theory of investment

KW - R&D

KW - Total asset growth

KW - Total profitability

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U2 - 10.1016/j.jbankfin.2014.08.010

DO - 10.1016/j.jbankfin.2014.08.010

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VL - 49

SP - 69

EP - 81

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

ER -

The q-theory explanation for the external financing effect: New evidence

Abstract

Keywords

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