Asymmetric Returns and the Economic Content of Accruals and Investment
34 Pages Posted: 1 May 2018
Date Written: April 13, 2018
We examine the economic content of accruals and investment and test whether they are related to nonlinear equity value and asymmetric returns arising from firm growth. We confirm that current accruals mainly reflect capital investment commitment to assets in place arising from past growth, though a part is related to future growth arising from innovation capacity (IC). We show that past and future growth components of accruals and investment have opposite effects on investors’ expectations of future asymmetric returns, i.e., skewness. The part of expected idiosyncratic skewness predicted using investment growth variables is negatively related to returns. A new growth-driven skewness factor built on differentials in expected idiosyncratic skewness significantly explains the time-series variation in hedge-portfolio returns of accruals and investment. Investments in innovative capacity (real options) are more pronounced in periods of greater uncertainty. We find that the accruals component related to past growth and commitment is significant in economic states of low market sensitivity, while the part related to future growth is significant in high sensitivity states.
Keywords: investment and accruals, volatility, growth options, nonlinear equity value, asymmetric returns, idiosyncratic skewness, anomalies
JEL Classification: G12
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