Investment Irreversibility, Cash Flow Risk, and Value-Growth Stock Return Effects

Authors


  • The authors acknowledge the helpful assistance of Att Kruafak, participants of the 2007 Financial Management Association annual meetings in Orlando, Florida, and participants in the 2006 doctoral research seminar series at The University of Texas at Arlington, and especially the many insights provided by the two anonymous referees. An earlier version of this paper appeared in Chapter 2 of Wikrom Prombutr's doctoral dissertation.

Corresponding author: Department of Finance, M. J. Neeley School of Business, Texas Christian University, Fort Worth, TX 76129; Phone: (817) 257-7420; Fax: (817) 257-7227; E-mail: l.lockwood@tcu.edu.

Abstract

We simulate results from a simple real options model to provide insight into the value-growth stock return anomaly. In our model, firms possess either single (“value” firm) or multiple (“growth” firm) investment opportunities. Our model predicts that growth firms: (1) invest sooner, (2) exhibit greater continuity in capital expenditure over time, (3) have lower book-to-market ratios, and (4) generate lower rates of return than value firms.

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