Are investment and financing anomalies two sides of the same coin?

It is commonly believed that the negative financing-return anomaly is associated with the negative investment-return anomaly. The purpose of this research is to thoroughly investigate this issue to answer the question of whether the return predictabilities based on investment and financing activity are interrelated and share the same underlying cause. We find that investment and financing activities are only weakly correlated and that the profitability profiles surrounding these two activities differ. After controlling for the book-to-market ratio, high investment firms are more profitable than low investment firms, while high financing firms are less profitable than low financing firms. In addition, the investment-return relation weakens after controlling for financing, while the financing-return relation remains significant after controlling for investment. Our evidence suggests that the investment-return relation does not explain the external financing anomaly.