The Q-theory Explanation for the External Financing Effect: New Evidence

Several studies document a robust negative association between net external financingand average stock returns, which is referred to as the external financingeffect. Using total asset growth as a comprehensive measure of overall corporate investment and total profitability gross of R&D expenditures as a measure of true economic profitability, we provide new evidence in support of the q-theory explanation for the external financingeffect. We also test the market timingexplanation for the external financingeffect but fail to document supportive evidence.