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Interpreting the Value Effect Through the Q-Theory: An Empirical Investigation

Interpreting the Value Effect Through the Q-Theory: An Empirical Investigation This article interprets the well-known value effect through the implications of standard Q-theory. An investment growth factor, defined as the difference in returns between low-investment stocks and high-investment stocks, contains information similar to the Fama and French (1993) value factor (HML), and can explain the value effect about as well as HML. In the cross-section, portfolios of firms with low investment growth rates (IGRs) or low investment-to-capital ratios have significantly higher average returns than those with high IGRs or high investment-to-capital ratios. The value effect largely disappears after controlling for investment, and the investment effect is robust against controls for the marginal product of capital. These results are consistent with the predictions of a standard Q-theory model with a stochastic discount factor. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

Interpreting the Value Effect Through the Q-Theory: An Empirical Investigation

The Review of Financial Studies , Volume 21 (4) – Jul 28, 2008

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References (54)

Publisher
Oxford University Press
Copyright
© The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org
Subject
Articles
ISSN
0893-9454
eISSN
1465-7368
DOI
10.1093/rfs/hhm051
Publisher site
See Article on Publisher Site

Abstract

This article interprets the well-known value effect through the implications of standard Q-theory. An investment growth factor, defined as the difference in returns between low-investment stocks and high-investment stocks, contains information similar to the Fama and French (1993) value factor (HML), and can explain the value effect about as well as HML. In the cross-section, portfolios of firms with low investment growth rates (IGRs) or low investment-to-capital ratios have significantly higher average returns than those with high IGRs or high investment-to-capital ratios. The value effect largely disappears after controlling for investment, and the investment effect is robust against controls for the marginal product of capital. These results are consistent with the predictions of a standard Q-theory model with a stochastic discount factor.

Journal

The Review of Financial StudiesOxford University Press

Published: Jul 28, 2008

Keywords: JEL G12

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