Department of Finance & Decision Sciences
The q-theory explanation for the external financing effect: New evidence
© 2014 Elsevier B.V. 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.
Cross-section of stock returns, External financing, Q-Theory of investment, R&D, Total asset growth, Total profitability
Source Publication Title
Journal of Banking and Finance
Huang, Yuan, F.Y. Eric C. Lam, and K. C. John Wei. "The q-theory explanation for the external financing effect: New evidence." Journal of Banking and Finance 49 (2014): 69-81.