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Do Investors Overvalue Firms with Bloated Balance Sheets?

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Author Info
Hirshleifer, David (Ohio State U)
Hou, Kewei
Teoh, Siew Hong
Zhang, Yinglei

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Abstract

When cumulative net operating income (accounting value-added) outstrips cumulative free cash flow (cash value-added), subsequent earnings growth is weak. If investors with limited attention focus on accounting profitability, and neglect information about cash profitability, then net operating assets, the cumulation of the discrepancies between the two, measures the extent to which reporting outcomes provoke over-optimism. During the 1964-2002 sample period, net operating assets scaled by total assets is a strong negative predictor of long-run stock returns. Predictability is robust with respect to an extensive set of controls and testing methods.

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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2004-18.

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Date of creation: Sep 2004
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Handle: RePEc:ecl:ohidic:2004-18

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 1998. "Relative valuation roles of equity book value and net income as a function of financial health," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 1-34, February. [Downloadable!] (restricted)
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  12. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January. [Downloadable!] (restricted)
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    Other versions:
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hou, Kewei & Hirshleifer, David & Teoh, Siew Hong, 2007. "The Accrual Anomaly: Risk or Mispricing?," MPRA Paper 5173, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Lin Peng & Wei Xiong, 2005. "Investor Attention: Overconfidence and Category Learning," NBER Working Papers 11400, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Ulrike Malmendier & Geoffrey Tate, 2008. "Superstar CEOs," NBER Working Papers 14140, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Hirshleifer, David & Teoh, Siew Hong & Yu, Jeff Jiewei, 2007. "Do short-sellers arbrtrage accrual-based return anomalies?," MPRA Paper 5510, University Library of Munich, Germany, revised 27 Oct 2007. [Downloadable!]
  5. Kothari, S.P. & Loutskina, Elena & Nikolaev, Valeri, 2006. "Agency theory of overvalued equity as an explanation for the accrual anomaly," Discussion Paper 103, Tilburg University, Center for Economic Research. [Downloadable!]
  6. Jin Ginger Wu & Lu Zhang & X. Frank Zhang, 2007. "Understanding the Accrual Anomaly," NBER Working Papers 13525, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Hirshleifer, David & Teoh, Siew Hong, 2005. "Limited Investor Attention and Stock Market Misreactions to Accounting Information," Working Paper Series 2005-24, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
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