Changes in Non‐Current Assets and in Property, Plant and Equipment and Future Stock Returns: The UK Evidence

55 Pages Posted: 10 Nov 2016

See all articles by Nikola Petrovic

Nikola Petrovic

Universidad San Francisco de Quito (USFQ)

Stuart Manson

University of Essex

Jerry Coakley

University of Essex - Essex Business School

Date Written: October/November 2016

Abstract

We examine the effect of changes in non‐current operating assets (NCOA) and of changes in property, plant and equipment (PPE) on future abnormal stock returns using a sample of 21,549 UK non‐financial firm observations over the 1990–2012 event period. The results from a matching portfolio procedure and 4‐factor regressions indicate that abnormal returns from investing in a portfolio of low‐minus‐high quintile NCOA and PPE change firms are between 5.5% and 6.1%. This negative association is confirmed by cross‐sectional regressions. The economic significance of mispricing seems weaker than in the US and weaker than the mispricing of working capital accruals adjusted for depreciation in the UK. Changes in PPE drive the predictability of share returns with respect to changes in NCOA. There is no significant evidence that return predictability is stronger in less liquid firms. We find two strands of evidence that lend some support to behavioural explanations of predictability through overreaction to investment. On one hand, fundamental information about investment explains one‐third of the predictability of returns while, on the other, predictability is generally not significantly stronger in firms with high operating leverage as a proxy for risk.

Keywords: non‐current operating assets, property, plant and equipment, liquidity, investments, operating leverage, mispricing, future returns

Suggested Citation

Petrovic, Nikola and Manson, Stuart and Coakley, Jerry, Changes in Non‐Current Assets and in Property, Plant and Equipment and Future Stock Returns: The UK Evidence (October/November 2016). Journal of Business Finance & Accounting, Vol. 43, Issue 9-10, pp. 1142-1196, 2016. Available at SSRN: https://ssrn.com/abstract=2867177 or http://dx.doi.org/10.1111/jbfa.12203

Nikola Petrovic (Contact Author)

Universidad San Francisco de Quito (USFQ) ( email )

Diego de Robles y Vía Interoceánic
Campus Cumbayá
QUITO, PICHINCHA 17-1200-84
Ecuador

Stuart Manson

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Jerry Coakley

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom
+44 1206 872455 (Phone)
+44 1206 873429 (Fax)

HOME PAGE: http://www.essex.ac.uk/afm/staff/coakley.shtm

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