Latent Accounting Growth, Corporate Financing Decisions, and Return Predictability
75 Pages Posted: 15 Mar 2012 Last revised: 22 Jan 2014
Date Written: March 14, 2012
We analyse interactions of simultaneous shifts in comprehensive balance sheet items annually and identify common (latent) factors, which are consistent across years. Five factors are interpreted to reflect five major decisions in businesses: Financial Flexibility, Short-term Credit, Long-term Capital Investment, Convertible Debt Usage, and Preferred Stock Usage. We show that these factors are robust predictors of long-run stock returns and earn incremental returns beyond well-known asset pricing models and return anomalies. Consistent with the Q theory of investment, they create value up to three lags and are strong negative predictors of future cash flows and future earnings.
Keywords: Asset Pricing Models; Multifactor Models; Accounting Growth; Factor Analysis; Cross-Section Stock Returns; Corporate Finance Policies
JEL Classification: C38; G12; G32
Suggested Citation: Suggested Citation