Department of Finance and 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
Link to Publisher's Edition
Huang, Y., Lam, F., & John Wei, K. (2014). The q-theory explanation for the external financing effect: New evidence. Journal of Banking and Finance, 49, 69-81. https://doi.org/10.1016/j.jbankfin.2014.08.010