External Financing, Growth and Stock Returns

External Financing, Growth and Stock Returns
Authors: G. Hardouvelis, G.Papanastasopoulos, D.Thomakos, T.Wang
January 2010, Journal:European Financial Management


In this paper we investigate the relation of the value/growth anomaly with the anomaly
on corporate financing activities. We confirm and expand earlier results that value/growth and
external financing indicators are, to some degree, related predictors of stock returns in the cross
section. We show that external financing indicators are incrementally informative since they pick
up stock returns associated with earnings quality. Portfolios that combine information from both
these indicators generate significantly higher returns than portfolios containing each individual
indicator. More importantly, our analysis strongly suggests that the external financing anomaly is,
to some extent, distinct from the value/growth anomaly, in that it may also reflect investors’
misunderstanding of the effects of opportunistic earnings management.
Keywords: Corporate financing activities, value/growth, earnings quality, stock returns
JEL classification: G10, M4

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