Asymmetric Returns and the Economic Content of Accruals and Investment

34 Pages Posted: 1 May 2018

See all articles by Luca Del Viva

Luca Del Viva

ESADE Business School

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Neophytos Lambertides

Cyprus University of Technology

Lenos Trigeorgis

University of Cyprus - Department of Public and Business Administration; King's College London; Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: April 13, 2018

Abstract

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

Suggested Citation

Del Viva, Luca and Kothari, S.P. and Lambertides, Neophytos and Trigeorgis, Lenos, Asymmetric Returns and the Economic Content of Accruals and Investment (April 13, 2018). Available at SSRN: https://ssrn.com/abstract=3161993 or http://dx.doi.org/10.2139/ssrn.3161993

Luca Del Viva

ESADE Business School ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034
Spain

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

Neophytos Lambertides

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Lenos Trigeorgis (Contact Author)

University of Cyprus - Department of Public and Business Administration ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
00357 2 338762 (Phone)
00357 2 339063 (Fax)

King's College London ( email )

Strand
London, WC2R 2LS
United Kingdom

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
263
Abstract Views
1,282
rank
115,931
PlumX Metrics