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Cash Flow and Discount Rate Risk in the Investment Effect: A Downside Risk Approach

Ehab Yamani and David Rakowski ()
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Ehab Yamani: Tanta University, Tanta, Egypt2Accounting, Finance, and Entrepreneurship Department, Jackson State University, 1400 John R. Lynch Street, Jackson, MS 39217, USA

Quarterly Journal of Finance (QJF), 2018, vol. 08, issue 03, 1-40

Abstract: We examine whether sensitivities to cash flow and discount rate risk in down markets explain the investment effect, in which low-investment stocks earn higher expected returns than high-investment stocks. We show how productivity and financing constraints asymmetrically impact the systematic risk of low-investment and high-investment firms, conditional on market state. Our evidence is consistent with both productivity constraints and financing constraints as explanations for the investment effect, but, contrary to expectations, more when prices are rising than falling.

Keywords: Investment effect; Q-theory; beta decomposition; time-varying expected returns; productivity constraints; financing constraints; downside risk (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1142/S2010139218500027

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