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1 – 2 of 2Georgios Papanastasopoulos, Dimitrios Thomakos and Tao Wang
The purpose of the paper is to investigate the relation between the value/growth anomaly and the external financing anomaly by considering an expanded value/growth indicator: free…
Abstract
Purpose
The purpose of the paper is to investigate the relation between the value/growth anomaly and the external financing anomaly by considering an expanded value/growth indicator: free cash flow yield (free cash flows scaled by price).
Design/methodology/approach
The paper utilizes portfolio‐level tests and cross‐sectional regressions.
Findings
In line with the literature on contrarian portfolios, this paper finds that firms with low (high) free cash flow yield are experiencing low (high) returns. However, only when an investor buys (sells) stocks of firms with high (low) free cash flow yield that distribute (raise) capital, his zero‐cost portfolio is significant. These findings are robust, irrespective of the financing vehicle (equity or debt). Overall, their evidence suggests that distinctions between the value/growth anomaly and the external financing anomaly partially disappear, if one is willing to employ free cash flow yield as a proxy of the former anomaly.
Originality/value
The paper enhances one's understanding of the relation between asset pricing anomalies.
Details
Keywords
Georgios Papanastasopoulos, Dimitrios Thomakos and Tao Wang
The purpose of this paper is to examine the informational content of retained and distributed earnings for future profitability and stock returns.
Abstract
Purpose
The purpose of this paper is to examine the informational content of retained and distributed earnings for future profitability and stock returns.
Design/methodology/approach
The paper utilizes firm‐level cross‐sectional persistent regressions, Mishkin's econometric framework and portfolio‐level analysis.
Findings
The paper shows that investors act as if the components of retained earnings (current operating accruals, non‐current operating accruals and retained cash flows) have similar implications for future profitability, leading to an overvaluation of their differential persistence. It also appears that while they cannot distinguish between the distinct properties of distributed earnings, they correctly anticipate the persistence of net cash distributions to debt holders (net debt repayment) but underestimate the persistence of net cash distributions to equity holders (dividends minus net stock issues). Overall, the findings of the paper suggest that the accrual anomaly documented in the accounting literature and the anomaly on net stock issues documented in the finance literature could be a subset of a larger anomaly on retained earnings.
Originality/value
The paper enhances one's understanding of the conflicting market's reaction to the accrual and cash flow component of earnings.
Details