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Two essays on stock market anomalies

Authors Lam, Eric Campbell Full Yet
Issue Date 2009
Summary This thesis studies two well known anomalies, the asset growth anomaly and the external financing anomaly. Chapter 1 examines the role of limits to arbitrage on the asset growth anomaly or the negative relationship between capital investment or asset growth and subsequent stock returns. We hypothesize that if the negative relationship is due to mispricing, it should be more pronounced and more persistent when there are more severe limits to arbitrage. The empirical evidence supports our hypothesis and the anomaly also vanishes when arbitrage is easy. Our findings are neither due to conventional risks, firm characteristics, equity issuance, idiosyncratic risk, manifestation of liquidity risk, and are not ex-post justified by trading expenses consisted of bid-ask spreads and commissions. Finally, limits to arbitrage also subsume the firm-size effect in the cross-sectional variation in the asset growth anomaly documented by Cooper et al. (2008) and Fama and French (2008). Chapter 2 offers a novel understanding of the cause of the external financing anomaly or the negative relationship between net overall external financing activities and future stock returns. Recent studies argue that the negative relationship is driven by earnings management and/or investment growth. However, we find that about half of the anomaly remains unexplained by these interpretations. The remaining predictability is not due to exposures to conventional risks, firm characteristics, the accruals factor, the asset growth factor, the wealth transfer hypothesis, or the issuer risk hypothesis, and is not driven by performance delistings or delistings associated with negative returns or unknown risks. Instead, it is attributed to the overvalued young and small unprofitable firms that lack internal funds and have limited access to public debt markets rely heavily on equity and modestly on private debt external financing to pursue their ambitious growth strategies through heavily investing in research and development.
Note Thesis (Ph.D.)--Hong Kong University of Science and Technology, 2009
Language English
Format Thesis
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