Revisiting the Investment Anomaly : Financing Constraints or Limits to Arbitrage?

The investment anomaly refers to the pervasive negative predictability in future stock returns following large firm investments. I re-investigate two competing hypotheses for the potential source of the anomaly: i) prolonged mispricing due to limits to arbitrage and ii) financing constraints in the context of Q-theory of investments. The analyses employ new proxies for financing constraints, the text-based measures developed by Hoberg and Maksimovic (2014). While the evidence supporting the limits-to-arbitrage hypothesis is stronger, there is a fair amount of evidence that financing constraints also reinforce the anomaly effect