Cash-Flow News and the Investment Effect in the Cross Section of Stock Returns

Abstract

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 preformation period to the postformation 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. This paper was accepted by Neng Wang, finance.

Rationality test in the housing market: Project‐level evidence from China

“…The first step of the rationality test decomposes the unexpected housing returns. The decomposition method is widely used in the stock pricing literature (J. Y. Campbell & Shiller, 1988a, 1988b; J. Y. Campbell & Vuolteenaho, 2004; Cohen et al, 2002; Mao & Wei, 2016; Vuolteenaho, 2002). This method is also recently applied to the house pricing literature (S. D. Campbell et al, 2009; Hiebert & Sydow, 2011).…”

“…Campbell & Shiller, 1988a, 1988b; J. Y. Campbell & Vuolteenaho, 2004;Cohen et al, 2002;Mao & Wei, 2016;Vuolteenaho, 2002). This method is also recently applied to the house pricing literature (S. D. Campbell et al, 2009;Hiebert & Sydow, 2011).…”

Arbitrage risk and the cross-section of stock returns: Evidence from China

“…include the firm size (e.g., Banz, 1981;Reinganum, 1983), the book-to-market ratio (e.g., Lakonishok et al, 1994;Asness et al, 2013), short-and long-term historical returns (e.g., Jagadeesh and Titman, 1993;Barroso and Santa-Clara, 2015;DeBondt and Thaler, 1985), and the accounting information such as accruals, investment capitals and profitability measures (e.g., Lawrence, 2013;Sloan, 1996;Dechow et al, 2012;Allen et al, 2013;Mao and Wei, 2016;Fama and French , 2006;Novy-Marx, 2013;Kogan and Papanikolaou, 2014).…”

Abnormal investment and firm performance

“…as Mao & Wei (2016) suggested, if market investors react to such new information and update their expectations on a firm's future growth with a delay, the current abnormal investment may exhibit certain predictability of future stock returns.…”