Asset tangibility, industry representation and the cross section of equity returns
Recent theory relates expected returns and covariant risk to the investment decisions of a firm across certain stages of the business cycle. Using the Australian accounting environment that provides a wider scope for the capitalisation of intangible assets compared with the United States, this paper tests the relationship between asset tangibility and returns within the Fama and MacBeth (1973) framework. A relationship is found to exist between asset tangibility and the cross-section of equity returns. This relationship is most evident in the materials industry, which is characterised by irreversible, firm-specific assets. These results persist after controlling for firm characteristics that Fama and French (1992) show are related to returns, although the effect is largely driven by microcap stocks.
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