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External Financing, Growth and Stock Returns

External Financing, Growth and Stock Returns
Authors: G. Hardouvelis, G.Papanastasopoulos, D.Thomakos, T.Wang
This Draft on January 2010,

Published in the Journal of European Financial Management on August, 2012


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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