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We study the out‐of‐sample and post‐publication return predictability of 97 variables shown to predict cross‐sectional stock returns. Portfolio returns are 26% lower out‐of‐sample and 58% lower post‐publication. The out‐of‐sample decline is an upper bound estimate of data mining effects. We estimate a 32% (58%–26%) lower return from publication‐informed trading. Post‐publication declines are greater for predictors with higher in‐sample returns, and returns are higher for portfolios concentrated in stocks with high idiosyncratic risk and low liquidity. Predictor portfolios exhibit post‐publication increases in correlations with other published‐predictor portfolios. Our findings suggest that investors learn about mispricing from academic publications.

Investor protection is associated with greater investment sensitivity to q and lower investment sensitivity to cash flow. Finance plays a role in causing these effects; in countries with strong investor protection, external finance increases more strongly with q, and declines more strongly with cash flow. We further find that q and cash flow sensitivities are associated with ex post investment efficiency; investment predicts growth and profits more strongly in countries with greater q sensitivities and lower cash flow sensitivities. The paper's findings are broadly consistent with investor protection promoting accurate share prices, reducing financial constraints, and encouraging efficient investment.IN THIS PAPER, WE study how investor protection affects firm-level resource allocations. Our analyses center on two hypotheses. Our first hypothesis is that stock prices more strongly predict both investment and external finance in countries with stronger investor protection laws. Tobin (1969) shows in a frictionless setting that marginal q predicts real investment. In this framework high marginal q firms should, all else equal, also raise the most capital as these firms invest more. We use average q (q) as a proxy for marginal q, and test whether investment and external finance are more sensitive to q in countries with stronger investor protection laws.We base our first hypothesis on three assumptions. First, we assume that investor protection laws encourage more accurate financial reporting (Leuz, Nanda, and Wysocki (2003)) and more arbitrage (Morck, Yeung, and Yu (2000)), both of which should result in stock prices that more accurately reflect fundamental values. Second, we assume that investor protections improve firms' access to external finance for value-enhancing projects (La Porta et al.

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The recent financial crisis shows that financial markets can impact the real economy. We investigate whether access to finance typically time-varies and, if so, what are the real effects. Consistent with time-varying external finance costs, both investment and employment are less sensitive to Tobin's q and more sensitive to cash flow during recessions and low investor sentiment periods. Share issuance plays a bigger role than debt issuance in causing these effects. Alternative tests that do not rely on q and cash flow sensitivities suggest that recessions and low sentiment increase external finance costs, thereby limiting investment and employment.