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


  • Wikrom Prombutr
  • Larry Lockwood
  • J. David Diltz


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. Copyright (c) 2010, The Eastern Finance Association.

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  • 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

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