Accretive Investment

Itzhak Ben-David and Alex Chinco

No 34061, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: EPS maximizers invest in accretive projects that generate enough income next year to pay for their own short-term funding using the firm’s cheapest available source of capital (equity, debt, or cash). This is the max EPS analog to the positive-NPV rule. On a per-dollar basis, accretive projects have income yields above the firm’s financing yield. An IRR is a multiperiod generalization of the project’s income yield. A payback period is the project’s income yield expressed as a multiple. Growth stocks have earnings yields below the riskfree rate. These firms view equity financing as cheap and fund new projects by issuing shares even when cash is present. Value stocks have earnings yields above the riskfree rate. These firms borrow enough to make external financing (both equity and debt) look expensive compared to cash, giving them high investment-cash flow sensitivities. We find empirical support for our model’s predictions.

JEL-codes: D03 D21 D22 D92 G02 G31 G32 G34 G35 J33 L21 M41 (search for similar items in EconPapers)
Date: 2025-07
New Economics Papers: this item is included in nep-cfn, nep-lma and nep-ppm
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