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

Mike Mao, K Wei

Research output: Contribution to journalArticleAcademicpeer-review

10 Citations (Scopus)

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 investment-to-assets, 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 return reversal is in line with the 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.
Original languageEnglish
Pages (from-to)2504-2519
Number of pages16
JournalManagement Science
Volume62
Issue number9
DOIs
Publication statusPublished - 2016

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