Access to Equity Markets, Corporate
Investments and Stock Returns:
International Evidence
By
Sheridan Titman: UT-Austin
K.C. John Wei: HKUST
Feixue Xie: UT-El Paso
2010 NTU Conference, Taipei
December 10, 2010
Introduction
• Capital investment or asset growth anomaly
– More investment -> lower subsequent stock returns
– Cannot be explained by CAPM or Fama-French factor
models
•
•
•
•
•
•
Baker, Stein, and Wurgler (2003),
Titman, Wei, and Xie (2004),
Anderson and Garcia-Feijoo (2006),
Fama and French (2008),
Cooper, Gulen, and Schill (2008),
Polk and Sapienza (2009), etc.
– Exception: Japan (Titman, Wei, and Xie (2009))
3/22/2016
2
Behavioral Explanations: Overinvestment
• Titman, Wei, and Xie (2004): Agency-based explanation
– Management empire building tendency (expropriation,
compensation, ego)
– Jensen’s (1986) agency cost of free cash flow:
Too much free cash flow  too much CAPX  overinvest
– Market mis-reaction to overinvestment: initially underreacts,
subsequently corrects its reaction to negative information on
overinvestment, resulting in lower stock returns
3/22/2016
3
Behavioral Explanations
• Overconfidence explanation
– Heaton (2002): managers overestimate return on investment
-> overinvestment
– Implication: cultures that promote overconfidence are likely
to exhibit a stronger asset growth effect
• Corporate governance
– Good corporate governance may mitigate overinvestment
• Implications: factors that affect corporate overinvestment
should also influence the asset growth effect
– If firms find it somewhat easier to overinvest in countries with easier
access to equity markets, there may be a stronger asset growth effect in
countries with better developed capital markets
3/22/2016
4
Behavioral Explanations
• Equity mispricing-based explanation (The catering theory of
investment or the market timing theory)
– Stein (1996) and Baker, Stein, and Wurgler (2003)
– Firms overvalued or undervalued from time to time and
firms tend to invest more when overvalued and less when
undervalued.
Empirical support: Polk and Sapienza (2009)
– mispricing proxy: discretionary accruals (DAC)
• negatively associated with future stock returns.
– higher DAC firms  invest more
3/22/2016
5
Rational explanations
•
The q-theory explanation
– Cochrane (1991, 1996), Li, Livdan, Zhang (2009), Liu,
Whited, and Zhang (2009), and others
– Rrequired rate of returns are time-varying and firms
investment more when their required rates of return
(expected returns) are lower (assuming that firms invest
optimally): ROIC = CoC
– The extended q-theory with investment frictions (Li and
Zhang (2010)): the investment effect is stronger when
frictions associated with increasing investment are stronger.
– Implication: the asset growth effect is expected to be higher
in countries with higher investment frictions
3/22/2016
6
Rational explanations
•
Option-theory explanation
– Berk, Green, and Naik (1999): after growth options are
exercised (increased investment), risk is reduced, ->
expected returns are lower
3/22/2016
7
Main objectives
• Overinvestment can be caused by
– the agency cost of free cash flow,
– managerial overconfidence, or
– equity overvaluation
• Objectives:
1. To examine the asset growth effect in an international setting
2. To examine the extent to which the cross-country variation
in the asset growth effect is generated by cross-country
differences in country characteristics such as the
development of local equity markets, managerial
overconfidence, and legal protection
3/22/2016
8
Main Findings
• Using data from over 13,300 firms across 40 countries during
1981-2005, there exists the investment effect outside the United
States
• With a few exceptions, most countries exhibit a negative
relation between asset growth and subsequent stock returns
• As a whole, the asset growth effect is highly significant among
developed countries, but is very weak and insignificant among
developing countries
• The asset growth effect in developed markets is very persistent
and lasts for at least five years after portfolio formation
3/22/2016
9
Main Findings
• Among developed countries, the difference in the asset growth
effect can be explained by the cross-country difference in the
ease of access to equity markets or equity market development
– the asset growth effect is 0.58% per month (or about 7% per
year) higher in countries in the top 30% than in the bottom
30% of all developed countries in the access-to-equity
market index
• The asset growth effect is also stronger in countries with more
overconfidence, and strong legal protection
• The inclusion of these country variables does not materially
affect the significant influence of the access to equity markets
on the asset growth effect
3/22/2016
10
Data: Country-level variables
• The ease of access to external markets
– the index of access-to-equity market: Global Competitiveness
Report from 1999 to 2006 surveyed by World Economic Forum
– the ratio of stock market capitalization to gross domestic product
(GDP) scaled by the fraction of stock market held by outside
investors
– Both are used by La Porta, Lopez-de-Silanes, and Shleifer (2006)
• Overconfidence
– The individualism index: from Hofstede (1980, 2001)
– Used by Chui, Titman, and Wei (2010)
3/22/2016
11
Data: Country-level variables
• Corporate governance (Legal protection of investors)
– the anti-self-dealing index
– It is from Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2008)
• Firm-level data: Financial and market data
– The US: CRSP and Compustat
– Other countries: Datastream
3/22/2016
12
Measurement of firm-level variables
• Total asset growth rate (TAG)
– TAGit = (TAit – TAit-1)/TAit-1
• Alternative measures
– Capx divided by net fixed assets and its variants
•
•
•
•
Firm size (SZ)
Book-to-market ratio (BM)
Momentum (MOM)
Equity issuance (Issue)
3/22/2016
13
Preliminary Results: Country by country
• Stocks are sorted into TAG quintiles for each country
• Table 1: The country-by-country asset growth effects
– Among developed countries, only 2 countries exhibit a reversed
asset growth effect (Israel and New Zealand) and both are
insignificant
– 14 out of the 26 developed countries have a significant asset growth
effect
– The asset growth effect is very weak in developing countries
– Only 3 out of the 14 developing countries have a significant asset
growth effect
– a considerable variation in the investment effect across countries
– the developed countries as a whole show a strong and significant
global investment effect, but not among developing countries
3/22/2016
14
Country
# of firms
Time Period
360
1981-2005
1.963 (4.16)
0.978 (2.28)
0.986 (4.00)
66
1987-2005
1.284 (2.83)
1.313 (3.51)
0.028 (0.08)
Belgium
374
1981-2005
1.448 (4.05)
0.972 (2.74)
0.476 (1.38)
Canada
433
1981-2005
2.155 (5.99)
1.259 (3.61)
0.896 (3.88)
Denmark
148
1985-2005
1.660 (4.45)
1.177 (3.85)
0.484 (1.91)
Finland
94
1989-2005
2.012 (3.65)
1.358 (2.61)
0.654 (1.54)
France
423
1981-2005
2.296 (6.24)
1.486 (4.22)
0.810 (4.22)
Germany
374
1981-2005
1.345 (4.06)
0.961 (2.89)
0.384 (2.24)
Greece
164
1989-2005
1.665 (1.79)
0.874 (1.09)
0.790 (1.79)
Hong Kong
348
1984-2005
2.704 (4.05)
1.419 (2.34)
1.285 (3.79)
48
1988-2005
71
1997-2005
2.201 (3.65)
1.435 (1.60)
0.974 (2.06)
1.605 (1.95)
1.227 (2.04)
-0.169 (-0.31)
188
1982-2005
1.438 (3.32)
1.434 (3.45)
0.005 (0.02)
1,757
1981-2005
1.397 (2.85)
1.062 (2.51)
0.335 (1.91)
429
1989-2005
126
1981-2005
1.676 (1.69)
1.729 (4.19)
0.895 (1.02)
1.555 (4.56)
0.780 (1.97)
0.175 (0.65)
69
1995-2005
1.240 (2.34)
1.451 (2.48)
-0.211 (-0.46)
Norway
132
1988-2005
1.330 (2.23)
1.163 (2.38)
0.166 (0.43)
Portugal
65
1990-2005
1.970 (3.02)
1.762 (2.90)
0.207 (0.29)
Singapore
223
1986-2005
1.631 (2.29)
1.378 (2.25)
0.253 (0.94)
Spain
118
1988-2005
1.598 (3.22)
1.431 (2.85)
0.167 (0.43)
Sweden
169
1984-2005
1.927 (3.74)
1.147 (2.51)
0.780 (2.41)
Switzerland
Taiwan
142
1981-2005
583
1994-2005
1.611 (5.00)
1.144 (1.09)
1.185 (3.63)
0.888 (1.05)
0.426 (1.81)
0.256 (0.41)
United Kingdom
1,091
1981-2005
1.860 (5.09)
0.802 (2.33)
1.057 (7.61)
United States
2,568
1981-2005
1.622 (4.46)
0.790 (2.12)
0.872 (5.38)
1.782 (5.56)
1.277 (4.65)
0.506 (5.74)
Australia
Austria
Ireland
Israel
Italy
Japan
Korea
Netherlands
New Zealand
Country-average
3/22/2016
TAG1
TAG5
TAG-hedge
15
Country
Argentina
# of firms
64
Period
1997-2005
TAG1
2.107 (1.81)
TAG5
0.479 (0.51)
TAG-hedge
1.629 (2.00)
Brazil
52
1991-2005
4.145 (3.42)
4.668 (3.60)
-0.522 (-0.36)
Chile
133
1993-2005
1.849 (3.11)
1.278 (2.43)
0.570 (1.55)
China
701
1994-2005
1.819 (2.10)
1.743 (2.30)
0.076 (0.15)
India
253
1990-2005
2.550 (3.07)
1.859 (2.53)
0.691 (1.66)
Indonesia
169
1990-2005
2.593 (1.84)
2.656 (1.78)
-0.063 (-0.10)
Malaysia
392
1987-2005
1.463 (1.60)
1.355 (1.63)
0.108 (0.39)
Mexico
97
1987-2005
1.938 (2.62)
1.488 (1.95)
0.450 (0.79)
Pakistan
72
1994-2005
1.948 (2.13)
1.951 (2.37)
-0.003 (-0.00)
138
1993-2005
1.617 (1.66)
1.089 (1.12)
0.528 (0.76)
83
1997-2005
3.465 (3.33)
2.838 (2.95)
0.627 (0.88)
South Africa
167
1981-2005
2.585 (4.82)
1.315 (2.84)
1.271 (3.40)
Thailand
293
1992-2005
2.357 (2.40)
0.792 (0.80)
1.565 (2.97)
Turkey
136
1994-2005
2.690 (1.85)
3.290 (2.38)
0.600 (1.22)
1.679 (6.65)
1.536 (3.44)
0.143 (0.63)
Philippines
Poland
Country-average
3/22/2016
16
Preliminary Results: Persistence
• Table 2: The persistence of the investment effect
• Raw returns
– There exists a persistent asset growth effect for all economies as a
whole, but the persistence mainly comes from the developed economies.
– No asset growth effect in any of the 5 years after portfolio formation
for the developing countries
• BM and SZ adjusted returns
– The same return patterns are observed but are weaker than those based
on raw returns.
3/22/2016
17
Persistence analysis
TAG quintile portfolio rank
Year
1
2
TAG-hedge
3
4
5
(1-5)
Panel A: Country-average TAG quintile portfolio for the whole sample
+1
1.861
1.731
1.605
1.485
1.374
0.487 (6.19)
+2
1.772
1.672
1.543
1.446
1.243
0.529 (6.70)
+3
1.770
1.607
1.648
1.527
1.270
0.500 (5.88)
+4
1.744
1.682
1.592
1.520
1.351
0.393 (4.74)
+5
1.608
1.568
1.416
1.444
1.296
0.312 (3.10)
Panel B: Country-average TAG quintile portfolio for developed economies
+1
1.782
1.716
1.565
1.456
1.277
0.506 (5.74)
+2
1.669
1.621
1.538
1.422
1.154
0.515 (5.81)
+3
1.689
1.574
1.567
1.476
1.223
0.466 (5.77)
+4
1.688
1.606
1.482
1.460
1.289
0.399 (4.96)
+5
1.476
1.493
1.350
1.360
1.128
0.349 (3.93)
Panel C: Country-average TAG quintile portfolio for developing economies
+1
1.679
1.441
1.440
1.408
1.536
0.143 (0.63)
+2
1.859
1.651
1.391
1.364
1.700
0.160 (0.69)
+3
1.861
1.594
1.847
1.626
1.574
0.288 (1.07)
+4
1.694
1.767
1.980
1.625
1.467
0.227 (0.71)
+5
1.640
1.452
1.409
1.473
1.663
0.025 (0.10)
3/22/2016
18
Preliminary Results: Regression analysis
• Table 3: Regression analysis from both regression models:
– total asset growth has a strong and negative effect on subsequent
stock returns for all sample economies or the developed
economies
– No asset growth effect for the developing economies
– Share issuance also has a negative effect on stock returns for the
whole sample and developed countries.
– But the inclusion of share issuance does not damper the effect of
asset growth on stock returns: the catering theory of investment
cannot fully explain the asset growth effect
• Implications from Tables 1 and 3:
– The results appear to be consistent with the overinvestment
explanation
– inconsistent with the prediction of the q-theory with investment
frictions
3/22/2016
19
Preliminary Results: Regression analysis
Independent variable
Panel A: Fama-MacBeth (1973) procedure
with the Newey-West adjustment
Whole
Developed
Developing
sample
economy
economy
Panel B: Fama-MacBeth (1973) procedure
with weights
Whole
Developed
Developing
Sample
economy
economy
-0.476
(-5.10)
-0.484
(-5.12)
0.489
(1.01)
-0.345
(-3.78)
-0.338
(-3.66)
0.488
(1.12)
Ln(BM)
0.185
(3.89)
0.176
(3.53)
0.252
(1.99)
0.133
(3.71)
0.165
(4.17)
0.109
(0.88)
Ln(SZ)
-0.092
(-2.62)
-0.077
(-2.16)
-0.207
(-2.64)
-0.085
(-3.08)
-0.064
(-2.25)
-0.155
(-2.10)
MOM
0.478
(2.30)
0.591
(2.86)
0.164
(0.28)
0.757
(3.65)
1.004
(4.64)
0.237
(0.43)
Issue
-0.262
(-4.01)
-0.244
(-3.77)
0.505
(0.69 )
-0.422
(-5.48)
-0.394
(-5.29)
0.489
(0.72)
Obs.
276
276
246
276
276
246
TAG
Null hypothesis test:
Difference in b1 coefficient
(t-statistic)
p-value (one-tailed test)
3/22/2016
-0.973
(-2.36)
0.009
-0.827
(-1.98)
0.024
20
Summary statistics and correlations
• Table 4: Summary statistics
– The developed countries have a higher average access-to-market index
than the developing countries with a value of 5.76 vs 4.78
– a higher average market cap to GDP ratio with a value of 0.59 vs 0.30.
– a higher average individualism index with a value of 60 vs 35.
– a higher average BM and SZ adjusted TAG-hedge returns with a value
of 0.27% vs 0.08% per month.
– there are more significant correlations in the developed economies
than in the developing economies.
– The correlations between the TAG-hedge returns and most other
variables are significant in the developed economies, but not in the
developing economies.
3/22/2016
21
Explanations for cross-country differences
in the asset growth effect
Variable
Access-to-equity
Mkt. cap to GDP
Indv. index
Anti-self dealing
Hedge return (%)
Obs.
26
26
26
26
5,508
Developed economies
Std. dev.
Min
Median
0.41
5.00
5.83
0.40
0.07
0.45
23.30
17.00
68.50
0.25
0.20
0.46
4.09
-80.63
30.24
Mean
5.76
0.59
60.04
0.54
0.27
Max
6.45
1.44
91.00
1.00
0.17
Obs.
13
11
13
13
1,757
Mean
4.87
0.30
35.31
0.53
0.08
Developed economies
Max
6.01
0.78
65.00
0.95
66.36
Developing economies
Access-to-eq
Mkt. cap to
Indv.
Anti-self
Access-to-equi
Mkt. cap to
Indv.
Anti-self
uity
GDP
index
dealing
ty
GDP
index
dealing
Mkt. cap to GDP
0.71**
Indv. index
0.41*
0.08
Anti-self dealing
0.38
0.27
-0.05
Hedge return
0.05**
0.04**
0.04**
3/22/2016
Developing economies
Std. dev.
Min
Median
0.85
3.21
4.94
0.26
0.11
0.18
15.75
14.00
32.00
0.26
0.17
0.58
6.91 -116.00
-0.12
0.59
0.03*
0.20
0.27
0.44
0.67*
-0.25
0.01
0.01
0.03
0.02
22
Explanations for cross-country differences
in the asset growth effect: Regression analysis
• Table 5: Regression analysis (Access to equity markets)
– The asset growth effect is significantly stronger in countries with easy
access to capital markets than in countries with limited access to capital
markets as measured by the access to equity market index (Panel A) or
the market ca to GDP ratio (Panel B)
– Implications: consistent with the overinvestment explanation and
inconsistent with the prediction of the q-theory with investment
frictions
• There is no significant difference in the asset growth effect
between the high and low individualism countries (Panel C)
but a significant difference between the strong and weak
investor protection countries (Panel D)
• Implications: inconsistent with the corporate governance argument
3/22/2016
23
Explanations for cross-country differences
in the asset growth effect: Regression analysis
Panel A: Access-to-equity market index
Low
(N=8)
TAG
Medium
(N=10)
High
(N=8 )
Panel B: Market cap to GDP ratio
Low
(N=8)
Medium
(N=9)
High
(N=9)
-0.060
(-0.31)
-0.239
(-1.72)
-0.530
(-5.44)
-0.010
(-0.06)
-0.481
(-3.87)
-0.499
(-5.08)
Ln(BM)
0.244
(3.47)
0.340
(4.78)
0.177
(3.10)
0.106
(1.62)
0.368
(5.87)
0.183
(3.07)
Ln(SZ)
-0.007
(-0.13)
-0.076
(-1.38)
-0.091
(-1.87)
-0.003
(-0.07)
-0.096
(-1.92)
-0.058
(-1.28)
MOM
0.634
(1.32)
-0.056
(-0.16)
0.840
(3.58)
1.242
(3.43)
0.062
(0.19)
0.705
(2.92)
Issue
-1.109
(-3.56)
-0.680
(-2.96)
-0.103
(-1.54)
-0.911
(-2.69)
-0.597
(-3.55)
-0.123
(-1.64)
Obs.
252
264
264
264
264
Null hypothesis test:
Difference in b1
(t-statistic)
p-value (one-tailed)
3/22/2016
264
-0.471
(-2.28)
0.01
-0.489
(-2.49)
0.01
24
Explanations for cross-country differences
in the asset growth effect: Regression analysis
Panel C: Individualism index
Low
(N=8)
TAG
Medium
(N=10)
High
(N=8 )
Panel D: Anti-self-dealing index
Low
(N=8)
Medium
(N=9)
High
(N=9)
-0.280
(-1.13)
-0.304
(-2.40)
-0.521
(-5.90)
-0.203
(-1.66)
-0.252
(-1.08)
-0.520
(-5.27)
Ln(BM)
0.469
(5.41)
0.196
(2.83)
0.135
(2.42)
0.191
(2.92)
0.269
(3.89)
0.177
(3.09)
Ln(SZ)
-0.091
(-1.26)
-0.050
(-1.29)
-0.070
(-1.63)
-0.059
(-1.50)
-0.040
(-0.64)
-0.093
(-1.90)
MOM
-0.767
(-1.99)
1.754
(4.97)
0.956
(4.20)
1.519
(4.22)
0.561
(1.39)
0.785
(3.35)
Issue
-1.246
(-3.33)
-0.383
(-1.26)
-0.122
(-1.98)
-0.358
(-1.36)
-1.396
(-5.17)
-0.118
(-1.71)
Obs.
264
264
264
264
264
264
Null hypothesis test:
Difference in b1
(t-statistic)
p-value (one-tailed)
3/22/2016
-0.242
(-1.06)
0.13
-0.317
(-2.14)
0.02
25
Explanations for cross-country differences
in the asset growth effect: Portfolio analysis
Table 6: Portfolio analysis
• The asset growth effect is significantly stronger in countries
with easy access to capital markets than in countries with
limited access to capital markets as measured by the access to
equity market index or the market cap to GDP ratio in
developed countries
• The asset growth effect is significantly stronger in countries
with higher individualism or in countries with stronger
investor protection for developed countries.
3/22/2016
26
Country institutions and the TAG effect
By the access-to-equity market index
TAG1
TAG5
Low
0.007
(0.09)
0.031
(0.46)
Medium
0.040
(0.56)
High
0.280
(4.16)
(High – Low) TAG-hedge
TAG-hedge
By the market cap to GDP ratio
TAG1
TAG5
TAG-hedge
-0.024
(0.21)
-0.098
(-1.20)
-0.016
(-0.21)
-0.083
(-0.68)
-0.118
(-2.42)
0.158
(1.70)
0.123
(2.16)
-0.129
(-2.72)
0.252
(3.10)
-0.275
(-4.87)
0.555
(5.97)
0.579
(4.03)
0.288
(3.53)
-0.221
(-3.74)
0.510
(4.76)
0.592
(3.67)
By the individualism index
By the anti-self-dealing index
TAG1
TAG5
TAG-hedge
TAG1
Low
0.056
(0.79)
-0.003
(-0.06)
0.059
(0.60)
-0.029
(-0.33)
-0.124
(-1.96)
-0.095
(-0.80)
Medium
0.065
(0.80)
-0.077
(-1.16)
0.142
(1.20)
0.154
(2.73)
-0.051
(-0.97)
0.205
(2.44)
High
0.192
(3.22)
-0.265
(-5.32)
0.457
(5.50)
0.136
(1.63)
-0.249
(-4.20)
0.385
(3.52)
(High – Low) TAG-hedge
3/22/2016
0.397
(3.12)
TAG5
TAG-hedge
0.480
(1.85)
27
Explanations for cross-country differences
in the asset growth effect: Regression analysis
Table 7: Regression analysis (univariate regressions)
• Panels A & B: The asset growth effect is stronger in developed
countries with easy access to capital markets as measured by the
access to equity market index (Model 1) or the market cap to
GDP ratio (Model 2), or high individualism (more overconfidence)
(Model 3).
• The asset growth effect is stronger in developed countries with
stronger investor protection only for the whole sample but not for
the subsample starting from 1988.
3/22/2016
28
Explanations for cross-country differences
in the asset growth effect: Regression analysis
Table 7: Regression analysis (multivariate regressions)
• The inclusion of individualism, and legal protection does not
damper the influence of access to capital markets on the asset
growth effect in developed markets
• In addition, individualism is also significant
• Implications from Tables 6 and 7: confirm the previous results.
– Consistent with the overinvestment explanation and inconsistent
with the prediction of the q-theory with investment frictions
3/22/2016
29
Explanations for cross-country differences
in the asset growth effect: Regression analysis
Panel A: The whole sample period
Univariate regression
Model
Intercept
Access-to- equity
market
1
-2.473
(-2.55)
2
0.009
(0.08)
3
-0.018
(-0.09)
Multivariate regression
4
0.014
(0.10)
0.473
(2.89)
Market cap to
GDP
5
-2.869
(-2.30)
6
-2.145
(-1.99)
0.537
(2.24)
0.398
(2.04)
0.407
(2.98)
Individualism
7
-0.212
(-0.99)
0.001
(0.13)
Anti-self dealing
0.331
(2.22)
0.004
(1.25)
0.221
(0.79)
0.487
(2.06)
9
-2.654
(-1.83)
10
-0.392
(-1.61)
0.464
(1.60)
0.407
(2.86)
0.005
(1.72)
8
-0.112
(-0.76)
0.337
(1.31)
0.316
(2.07)
0.001
(0.20)
0.004
(1.18)
0.344
(1.16)
0.471
(1.77)
9
-2.602
(-2.38)
0.412
(1.99)
10
-0.667
(-2.60)
Panel B: Subsample period starting 1988
Model
Intercept
Access-to- equity
market
Market cap to
GDP
Individualism
Anti-self dealing
3/22/2016
1
-3.019
(-2.91)
0.570
(3.19)
Univariate regression
2
3
-0.023
-0.295
(-0.19)
(-1.74)
4
0.093
(0.58)
5
-2.764
(-2.66)
0.459
(2.53)
6
-3.029
(-2.82)
0.575
(2.97)
0.477
(3.14)
Multivariate regression
7
8
-0.550
-0.065
(-2.69)
(-0.39)
0.461
(3.07)
0.009
(3.46)
0.006
(2.31)
0.340
(1.33)
0.449
(2.82)
0.008
(3.26)
-0.038
(-0.14)
0.116
(0.43)
0.412
(2.60)
0.007
(2.34)
0.009
(3.35)
0.135
(0.46)
0.223
(0.81)
30
Conclusion
• There is the asset growth effect outside the United States.
• We find a strong asset growth effect among developed
economies but not among developing economies.
• Developed countries with easy access to equity markets and
more overconfidence cultures show a stronger asset growth
effect, possibly through a propensity-to-overinvest channel.
• But the inclusion of these country institutional variables does
not damper the effect of the ease of access to equity markets.
• Our results appear to be generally consistent with an
overinvestment explanation by Titman, Wei, and Xie (2004)
and to be inconsistent with the prediction by the q-theory with
investment frictions suggested by Li and Zhang (2010).
3/22/2016
31
Conclusion
• In sum, we provide evidence that cross-country differences in
access to equity markets and cultures can affect cross-country
differences in the asset growth effect.
• Our results provide a challenge to market efficient hypothesis
and behavioral as well as the traditional risk-based theories.
– Risk-based: Why asset growth portfolios are risky in developed countries
but not in developing markets?
– Behavior based: why managers have a tendency to overinvest and at the
same time investors tend to underreact to the negative information
contained in overinvestment in developed markets, but it is in developing
markets?
3/22/2016
32