Bloated balance sheets and stock returns: Asymmetries between profit and loss firms

Georgios A. Papanastasopoulos

Abstract


We study return predictability attributable to bloated balance sheets in European capital markets and find that the NOA anomaly is more severe across loss firms and is significantly attenuated across profit firms. A hedge trading strategy on NOA for loss firms generate large raw and abnormal returns that are almost three times higher than the respective returns for profit firms. Our evidence is more likely to be consistent with the hypothesis that low NOA firms may have superior returns relative to high NOA firms due to investors’ inability to make full use of information reported in financial statements.


Full Text:

PDF

References


Basu, S. 1997. The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24, 3-37.

Chan, L., Dimmock, S., Lakonishok, J. 2009. Benchmarking Money Manager Performance: Issues and Evidence, Review of Financial Studies, 22, 4553-4599.

Grobys, K. 2014. Momentum in global equity markets in times of troubles: Does the economic state matter? Economic Letters 123, 100-103.

Hayn, C. 1995. The information content of losses. Journal of Accounting and Economics, 20, 125–153.

Hirshleifer, D., Hou, K., Teoh, S., Zhang Y. 2004. Do investors overvalue firms with bloated balance sheets? Journal of Accounting and Economics, 38, 297-331.

Hirshleifer, D., Hou, K., Teoh, S. 2012. The accrual anomaly: Risk or mispricing? Management Science, 58, 320-335.

Papanastasopoulos, G., Thomakos, D. 2017. Managerial discretion, net operating assets and the cross-section of stock returns: Evidence from European countries. Journal of International Financial Markets, Institutions and Money, 47, 188-210.

Patatoukas, P. 2016. Asymmetrically timely loss recognition and the accrual anomaly. Abacus, 52, 166-175.

Pinnuck, M., Shekhar. C. 2013. The Profit versus Loss Heuristic and Firm Financing Decisions. Accounting, Organizations and Society, 38, 420-439.

Schleicher, T., Hussainey, K., Walker, M. 2007. Loss firms’ annual report narratives and share price anticipation of earnings. The British Accounting Review, 39, 153–171.

Wu. J., Zhang, L., Zhang, F. 2010. The q-theory approach to understanding the accrual anomaly. Journal of Accounting Research, 48, 177-223.




DOI: https://doi.org/10.17811/ebl.8.1.2019.%25p

Refbacks

  • There are currently no refbacks.


ISSN: 2254-4380