Tangibility and Investment Irreversibility in Asset Pricing

31 Pages Posted: 22 Aug 2009 Last revised: 1 Feb 2010

See all articles by Paul Docherty

Paul Docherty

Monash University

H. Chan

University of Melbourne - Department of Finance; Monash University - Department of Accounting

Stephen Andrew Easton

University of Newcastle

Multiple version iconThere are 2 versions of this paper

Date Written: August 20, 2009

Abstract

Zhang (2005) and Cooper (2006) provide a theoretical risk-based explanation for the value premium by suggesting a nexus between firms’ book-to-market ratio and investment irreversibility. They argue that unproductive physical capacity is costly in contracting conditions, but provides growth opportunities during economic expansions, resulting in covariant risk between firms’ investment in tangible assets and market-wide returns.

This paper uses the Australian accounting environment to empirically test this theory – a test that is not possible using US data. Consistent with the theoretical argument, tangibility is priced in equity returns, and augmenting the Fama and French three-factor model with a tangibility factor increases model explanatory power.

Keywords: Asset pricing, tangibility of assets, investment irreversibility, Fama-French model

JEL Classification: G12, G14

Suggested Citation

Docherty, Paul and Chan, Howard and Easton, Stephen Andrew, Tangibility and Investment Irreversibility in Asset Pricing (August 20, 2009). 22nd Australasian Finance and Banking Conference 2009. Available at SSRN: https://ssrn.com/abstract=1458238 or http://dx.doi.org/10.2139/ssrn.1458238

Paul Docherty (Contact Author)

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Howard Chan

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Stephen Andrew Easton

University of Newcastle ( email )

University Drive
Callaghan, nsw 2308
Australia

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