Cash Flow News and the Investment Effect in the Cross-Section of Stock Returns
Management Science, Forthcoming
41 Pages Posted: 29 Jul 2014 Last revised: 28 May 2015
Date Written: April 21, 2015
This study provides novel evidence that cash flow news quantitatively explains the investment effect in the cross-section of stock returns. The negative return predictability of asset growth, investment growth, and accruals is evident only through the cash flow news component of returns. The cash flow news returns associated with investment-sorted portfolios exhibit a reversal from the pre-formation period to the post-formation period. Such a return reversal is in line with reversals in firm fundamentals and becomes stronger for stocks with higher information uncertainty. Our findings are consistent with the expectational errors hypothesis and fail to support the risk-based explanation for the investment effect.
Keywords: Investment effect; q-theory; cash flow news; return decomposition.
JEL Classification: G12, G14
Suggested Citation: Suggested Citation