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

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  • Wikrom Prombutr
  • Larry Lockwood
  • J. David Diltz

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.

Suggested Citation

  • Wikrom Prombutr & Larry Lockwood & J. David Diltz, 2010. "Investment Irreversibility, Cash Flow Risk, and Value‐Growth Stock Return Effects," The Financial Review, Eastern Finance Association, vol. 45(2), pages 287-305, May.
    • Handle: RePEc:bla:finrev:v:45:y:2010:i:2:p:287-305
    DOI: 10.1111/j.1540-6288.2010.00248.x
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