Epistemology

Profitability index

Econometrics

Microeconomics

Tobin's q

Philosophy

Economics

Finance

Equity (law)

Politics

Political science

Monetary economics

Investment (military)

Explanatory power

Growth model

Review of Finance

In the investment theory, firms with high expected investment growth earn higher expected returns than firms with low expected investment growth, holding investment and expected profitability constant. Building on cross-sectional growth forecasts with Tobin’s q, operating cash flows, and change in return on equity as predictors, an expected growth factor earns an average premium of 0.84% per month (t = 10.27) in the 1967–2018 sample. The q5 model, which augments the Hou–Xue–Zhang (2015, Rev. Finan. Stud., 28, 650–705) q-factor model with the expected growth factor, shows strong explanatory power in the cross-section and outperforms the Fama–French (2018, J. Finan. Econom., 128, 234–252) six-factor model.

An Augmented <i>q</i>-Factor Model with Expected Growth*

An Augmented q-Factor Model with Expected Growth*