Returns to scale and asset prices
Journal
Journal of Business Finance and Accounting
Journal Volume
46
Journal Issue
9-10
Pages
1299-1318
Date Issued
2019
Author(s)
Abstract
Abstract The q ‐theory of investment is proposed to explain firm growth effects, where previous papers identify a negative effect of firm growth, including asset growth, real investment and net share issuance, on future stock returns. This paper uses returns to scale from the production function to test the dynamic q ‐theory, which predicts that the firm growth effect is theoretically weaker for firms with decreasing returns to scale (DRS) than for non‐DRS firms. Our empirical results generally support the prediction of dynamic q ‐theory. However, we find that the dynamic q ‐theory explains little of the value, momentum and ROE effects from the standpoint of returns to scale.
Type
journal article