The 52-Week High, Q Theory and the Asset Growth and Equity Financing Anomalies

Abstract

We examine whether the low returns to firms with high asset growth are consistent with mispricing or q theory. Our strategy is to condition on a variable that earlier work shows is related to mispricing and that has either no association or, if any, an opposite directional association with returns under q theory. The variable is the proximity of a stock's price to its 52-week high. We find that the low returns to high asset growth firms are largely attributable to stocks whose prices are farthest from their 52-week highs, consistent with mispricing. Outside these stocks, the returns to high investment firms are not low. We also find that the explanatory power of an investment factor for explaining the returns to stocks that issue equity is attributable to stocks in the factor that the mispricing hypothesis suggests should matter. This favors the interpretations that (i) the asset growth anomaly arises because investors underreact to the bad news contained in aggressive asset growth when stock prices are far from their 52-week highs, and (ii) the investment factor explains the returns to equity issuers because it mimics the systematic component of the returns to mispriced stocks rather than a cost-of-capital spread.