Latent Accounting Growth, Corporate Financing Decisions, and Return Predictability

75 Pages Posted: 15 Mar 2012 Last revised: 22 Jan 2014

See all articles by Suresh Kumar

Suresh Kumar

Massey University

Jianguo Chen

Massey University - School of Economics and Finance

Udomsak Wongchoti

Massey University - School of Economics and Finance

Date Written: March 14, 2012

Abstract

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

Oad Rajput, Suresh Kumar and Chen, Jianguo and Wongchoti, Udomsak, Latent Accounting Growth, Corporate Financing Decisions, and Return Predictability (March 14, 2012). Available at SSRN: https://ssrn.com/abstract=2022610 or http://dx.doi.org/10.2139/ssrn.2022610

Suresh Kumar Oad Rajput

Massey University ( email )

Private Bag 11 222
Palmerston North, Manawatu 4442
New Zealand

Jianguo Chen (Contact Author)

Massey University - School of Economics and Finance ( email )

Private Bag 11-222
Palmerston North, 30974
New Zealand

Udomsak Wongchoti

Massey University - School of Economics and Finance ( email )

Private Bag 11-222
Palmerston North, 30974
New Zealand

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