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Interpreting the Value Effect through the Q-Theory: An Empirical Investigation
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Interpreting the Value Effect through the Q-Theory: An Empirical Investigation
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Interpreting the Value Effect through the Q-Theory: An Empirical Investigation
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Journal Article
Interpreting the Value Effect through the Q-Theory: An Empirical Investigation
2008
Overview
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.
