Q-theory predicts that investment frictions steepen the relation between expected returns and firm investment. Using financing constraints to proxy for investment frictions, we document only weak evidence that the investment-to-assets and asset growth effects in the cross-section of returns are...

We investigate the cost of capital in a model with an agency conflict between inside managers and outside shareholders. Inside ownership reflects the classic tradeoff between incentives and risk diversification, and the severity of agency costs depends on a parameter representing investor...

We question a deep-ingrained doctrine in asset pricing: if an empirical characteristic-return relation is consistent with investor “rationality,” the relation must be “explained” by a risk factor model. The investment approach changes the big picture of asset pricing. Factors formed on...

This paper shows documents the fact that high growth firms maintain low debt levels. It then shows a dynamic model of financing and investment with costs of equity issuance rationalizes these findings. In the model firms keep debt at a level that lets them finance their investment purely from...

Methodologically, the recommended investment project (IP) selection system is distinguished from one in force by: new conception allowing for time factor; evaluating IP efficiency by eventual reproduction results, not by intermediate investment activity results (included is a generalized...

We model corporate liquidity policy and show that aggregate risk exposure is a key determinant of how firms choose between cash and bank credit lines. Banks create liquidity for firms by pooling their idiosyncratic risks. As a result, firms with high aggregate risk find it costly to get credit...

We propose and test a theory of corporate liquidity management in which credit lines provided by banks to firms are a form of monitored liquidity insurance. Bank monitoring and resulting credit line revocations help control illiquidity-seeking behavior by firms. Firms with high liquidity risk...

Method discounting cash flow (DCF) is analyzed in the article. Article is demonstrating complete economic insolvency DCF. The fallacy of discounting method causes serious distortion of the results. It's wide usage entails negative consequences not only for the concrete investor, but also for the...

Cash holdings as a proportion of total assets of U.S corporations have roughly doubled between 1971 and 2006. Prior research attributes the large cash increase to a rise in firms' idiosyncratic risk. We investigate two mechanisms by which increased idiosyncratic risk can lead to higher cash...

We take a simple q-theory model and ask how well it can explain external financing anomalies, both qualitatively and quantitatively. Our central insight is that optimal investment is an important driving force of these anomalies. The model simultaneously reproduces procyclical equity issuance...