The Role of Financial Inflexibility in Explaining Value Anomaly with‌ Emphasis on the Business Cycle

Document Type : Research Paper

Authors

1 Department of Accounting and Finance, Faculty of management and accounting, University of Tehran, Campus of Farabi

2 Assistant professor, Department of Accounting and Finance, Faculty of Management and Accounting, Farabi Campus, University of Tehran, Iran

3 Associate Professor in Economics, Department of economics, Bu Ali Sina University, Hamedan, Iran

4 PhD Student in Financial Management, Faculty of Management and Accounting, Farabi Campus, University of Tehran, Iran

Abstract

Partly on the issue that value stocks earn higher returns than growth stocks, there is agreement, but the interpretation of the cause is controversial and there is no clear explanation for this stock feature. According to investment-based asset pricing theory, the financial inflexibility is the reason for expected return of value firms covary more with recessions than the expected returns of growth firms. The present study seeks to determine the effectiveness of the value anomaly of financial inflexibility with attention to the business cycle. In order to achieve the research goals using systematic removal sampling method, the monthly data of 450 year - firm has been used during the period from 2008 to 2017. To test the research hypotheses, regression method using time series and panel data was used. The results of the research show that the financial inflexibility leads to a positive risk premium in the stock level and investment portfolios and value firms gain higher future returns than growth firms due to compensate for the risk of financial inflexibility, and Finally, the effect of financial inflexibility on stock risk premium is not constant during the business cycle, and in times of recession, value companies are more exposed to risk of financial inflexibility than growth companies.

Keywords

References

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History

  • Receive Date: 26 May 2019
  • Revise Date: 04 January 2020
  • Accept Date: 18 January 2020

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