The Balance Sheet Investment - Cashflow and Cross-Section of Stock Returns

Abstract:     
We employ factor analysis to aggregate balance sheet asset investment - cashflow (growth) information into five factors which are not reported in literature. These emerging factors are stable through time and in the presence of well-established factors in explaining the considerable amount of cross-sectional variation in average stock returns. Thus, complement well known determinants such as book-to-market, size, and lagged-returns and other asset growth measures for instance accounting accruals, cumulative accruals, investment-to-assets, and the total asset growth measures. These factors also determine a firm’s performances such as profitability and value and provide further rationales on the asset growth anomaly. Finally, our results are robust to sub-period analysis, frequency of return series, size effect, and industry effect.

Number of Pages in PDF File: 55

Keywords: investment - cashflow, factor analysis, cross-section of stock returns, asset pricing, anomalies, risk factors, value of firm, profitability

JEL Classification: C38, D02, G11, G12, G15, G32, L25

working papers series