Tangibility and Investment Irreversibility in Asset Pricing

19 Pages Posted: 8 Nov 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

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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 article 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.

Suggested Citation

Docherty, Paul and Chan, Howard and Easton, Stephen Andrew, Tangibility and Investment Irreversibility in Asset Pricing. Accounting & Finance, Vol. 50, No. 4, pp. 809-827, December 2010. Available at SSRN: https://ssrn.com/abstract=1702590 or http://dx.doi.org/10.1111/j.1467-629X.2010.00348.x

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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