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Cash-flow news and the investment effect in the cross section of stock returns
This study provides novel evidence that cash-flow news quantitatively explains the investment effect in the cross section of stock returns. The negative return predictability of asset growth, investment growth, and accruals is evident only through the cash-flow news component of returns. The cash-flow news returns associated with investment-sorted portfolios exhibit a reversal from the preformation period to the postformation period. Such a return reversal is in line with reversals in firm fundamentals and becomes stronger for stocks with higher information uncertainty. Our findings are consistent with the expectational errors hypothesis and fail to support the risk-based explanation for the investment effect. This paper was accepted by Neng Wang, finance.
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Journal
Management ScienceVolume
62Issue
9Pagination
2504 - 2519Publisher
INFORMSPublisher DOI
ISSN
0025-1909eISSN
1526-5501Language
EnglishPublication classification
C1.1 Refereed article in a scholarly journal; C Journal articleCopyright notice
2016, INFORMSUsage metrics
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No categories selectedKeywords
Social SciencesScience & TechnologyTechnologyManagementOperations Research & Management ScienceBusiness & Economicsinvestment effectq-theorycash-flow newsreturn decompositionASSET GROWTHIMPLIED COSTTRADING ACTIVITYEARNINGSMARKETRISKINFORMATIONANOMALIESPROFITABILITYDECOMPOSITIONstock returnsinvestment growthaccruals
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