IDEAS home Printed from https://ideas.repec.org/a/eee/intfin/v47y2017icp188-210.html
   My bibliography  Save this article

Managerial discretion, net operating assets and the cross-section of stock returns: Evidence from European countries

Author

Listed:
  • Papanastasopoulos, Georgios
  • Thomakos, Dimitrios

Abstract

We show that firms with higher NOA (net operating assets) subsequently experience lower stock returns in at least nine out of sixteen European countries, consistent with the U.S. evidence. This negative relation between NOA and future returns is strongly linked with cross-country variation in factors capturing managerial discretion. However, once we adjust for risk, the effect of NOA on stock returns is substantially attenuated and becomes significant only in three European countries. Overall, our findings suggest that optimal investment by executives in response to discount rate changes could be an underlying source of return predictability attributable to NOA in Europe.

Suggested Citation

  • Papanastasopoulos, Georgios & Thomakos, Dimitrios, 2017. "Managerial discretion, net operating assets and the cross-section of stock returns: Evidence from European countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 47(C), pages 188-210.
    • Handle: RePEc:eee:intfin:v:47:y:2017:i:c:p:188-210
    DOI: 10.1016/j.intfin.2016.11.013
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1042443116301949
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.intfin.2016.11.013?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Liang Shao & Chuck CY Kwok & Omrane Guedhami, 2010. "National culture and dividend policy," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 41(8), pages 1391-1414, October.
    2. Robert M. Bushman & Joseph D. Piotroski & Abbie J. Smith, 2004. "What Determines Corporate Transparency?," Journal of Accounting Research, Wiley Blackwell, vol. 42(2), pages 207-252, May.
    3. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 2006. "What Works in Securities Laws?," Journal of Finance, American Finance Association, vol. 61(1), pages 1-32, February.
    4. Garen Markarian & Juan Santalo´, 2014. "Product Market Competition, Information and Earnings Management," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(5-6), pages 572-599, June.
    5. Fama, Eugene F., 1998. "Market efficiency, long-term returns, and behavioral finance," Journal of Financial Economics, Elsevier, vol. 49(3), pages 283-306, September.
    6. Linghui Tang & Peter E Koveos, 2008. "A framework to update Hofstede's cultural value indices: economic dynamics and institutional stability," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 39(6), pages 1045-1063, September.
    7. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer & Robert Vishny, 2002. "Investor Protection and Corporate Valuation," Journal of Finance, American Finance Association, vol. 57(3), pages 1147-1170, June.
    8. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    9. Yao, Tong & Yu, Tong & Zhang, Ting & Chen, Shaw, 2011. "Asset growth and stock returns: Evidence from Asian financial markets," Pacific-Basin Finance Journal, Elsevier, vol. 19(1), pages 115-139, January.
    10. Chudek, Mark & Truong, Cameron & Veeraraghavan, Madhu, 2011. "Is trading on earnings surprises a profitable strategy? Canadian evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(5), pages 832-850.
    11. Eugene F. Fama & Kenneth R. French, 2008. "Dissecting Anomalies," Journal of Finance, American Finance Association, vol. 63(4), pages 1653-1678, August.
    12. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    13. Sam Han & Tony Kang & Stephen Salter & Yong Keun Yoo, 2010. "A cross-country study on the effects of national culture on earnings management," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 41(1), pages 123-141, January.
    14. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    15. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    16. Patricia M. Dechow & Scott A. Richardson & Richard G. Sloan, 2008. "The Persistence and Pricing of the Cash Component of Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 46(3), pages 537-566, June.
    17. Hirshleifer, David & Kewei Hou & Teoh, Siew Hong & Yinglei Zhang, 2004. "Do investors overvalue firms with bloated balance sheets?," Journal of Accounting and Economics, Elsevier, vol. 38(1), pages 297-331, December.
    18. Leuz, Christian & Nanda, Dhananjay & Wysocki, Peter D., 2003. "Earnings management and investor protection: an international comparison," Journal of Financial Economics, Elsevier, vol. 69(3), pages 505-527, September.
    19. Jin (Ginger) Wu & Lu Zhang & X. Frank Zhang, 2010. "The q‐Theory Approach to Understanding the Accrual Anomaly," Journal of Accounting Research, Wiley Blackwell, vol. 48(1), pages 177-223, March.
    20. Michael J. Cooper & Huseyin Gulen & Michael J. Schill, 2008. "Asset Growth and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 63(4), pages 1609-1651, August.
    21. Wu, Yuliang & Li, Youwei, 2011. "Long-term return reversals--Value and growth or tax? UK evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(3), pages 347-368, July.
    22. Brown, Lawrence D. & Ngo Higgins, Huong, 2001. "Managing earnings surprises in the US versus 12 other countries," Journal of Accounting and Public Policy, Elsevier, vol. 20(4-5), pages 373-398.
    23. David McLean, R. & Pontiff, Jeffrey & Watanabe, Akiko, 2009. "Share issuance and cross-sectional returns: International evidence," Journal of Financial Economics, Elsevier, vol. 94(1), pages 1-17, October.
    24. Matoussi, Hamadi & Jardak, Maha Khemakhem, 2012. "International Corporate Governance and Finance: Legal, Cultural and Political Explanations," The International Journal of Accounting, Elsevier, vol. 47(1), pages 1-43.
    25. Simi Kedia & Thomas Philippon, 2009. "The Economics of Fraudulent Accounting," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2169-2199, June.
    26. Konan Chan & Louis K. C. Chan & Narasimhan Jegadeesh & Josef Lakonishok, 2006. "Earnings Quality and Stock Returns," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1041-1082, May.
    27. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-746, August.
    28. Andy C.W. Chui & Sheridan Titman & K.C. John Wei, 2010. "Individualism and Momentum around the World," Journal of Finance, American Finance Association, vol. 65(1), pages 361-392, February.
    29. Degeorge, Francois & Patel, Jayendu & Zeckhauser, Richard, 1999. "Earnings Management to Exceed Thresholds," The Journal of Business, University of Chicago Press, vol. 72(1), pages 1-33, January.
    30. Rachel Griffith, 2001. "Product market competition, efficiency and agency costs: an empirical analysis," IFS Working Papers W01/12, Institute for Fiscal Studies.
    31. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    32. Li, Dongmei & Zhang, Lu, 2010. "Does q-theory with investment frictions explain anomalies in the cross section of returns?," Journal of Financial Economics, Elsevier, vol. 98(2), pages 297-314, November.
    33. Ball, Ray & Kothari, S. P. & Robin, Ashok, 2000. "The effect of international institutional factors on properties of accounting earnings," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 1-51, February.
    34. Watanabe, Akiko & Xu, Yan & Yao, Tong & Yu, Tong, 2013. "The asset growth effect: Insights from international equity markets," Journal of Financial Economics, Elsevier, vol. 108(2), pages 529-563.
    35. Kalok Chan & Vicentiu Covrig & Lilian Ng, 2005. "What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide," Journal of Finance, American Finance Association, vol. 60(3), pages 1495-1534, June.
    36. Ozgur S. Ince & R. Burt Porter, 2006. "Individual Equity Return Data From Thomson Datastream: Handle With Care!," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 29(4), pages 463-479, December.
    37. Nguyen, Nhut H. & Truong, Cameron, 2013. "The information content of stock markets around the world: A cultural explanation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 1-29.
    38. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    39. Brown, Lawrence D. & Higgins, Huong N., 2005. "Managers' forecast guidance of analysts: International evidence," Journal of Accounting and Public Policy, Elsevier, vol. 24(4), pages 280-299.
    40. Miguel Arce & Araceli Mora, 2002. "Empirical evidence of the effect of European accounting differences on the stock market valuation of earnings and book value," European Accounting Review, Taylor & Francis Journals, vol. 11(3), pages 573-599.
    41. Gray, Philip & Johnson, Jessica, 2011. "The relationship between asset growth and the cross-section of stock returns," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 670-680, March.
    42. R. David Mclean & Tianyu Zhang & Mengxin Zhao, 2012. "Why Does the Law Matter? Investor Protection and Its Effects on Investment, Finance, and Growth," Journal of Finance, American Finance Association, vol. 67(1), pages 313-350, February.
    43. Titman, Sheridan & John Wei, K. C. & Xie, Feixue, 2013. "Market Development and the Asset Growth Effect: International Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(5), pages 1405-1432, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Georgios A. Papanastasopoulos, 2019. "Bloated balance sheets and stock returns: Asymmetries between profit and loss firms," Economics and Business Letters, Oviedo University Press, vol. 8(1), pages 53-61.
    2. Lartey, Theophilus & Uddin, Moshfique & Danso, Albert & Wood, Geoffrey, 2022. "CEO overconfidence and IRS attention," Journal of Financial Stability, Elsevier, vol. 61(C).
    3. Veronika Jezkova & Zuzana Rowland & Veronika Machova & Jan Hejda, 2020. "The Intrinsic Value of an Enterprise Determined by Means of the FCFE Tool," Sustainability, MDPI, vol. 12(21), pages 1-13, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Georgios A. Papanastasopoulos, 2014. "Accounting Accruals and Stock Returns: Evidence from European Equity Markets," European Accounting Review, Taylor & Francis Journals, vol. 23(4), pages 729-768, December.
    2. Doukakis, Leonidas C. & Papanastasopoulos, Georgios A., 2014. "The accrual anomaly in the U.K. stock market: Implications of growth and accounting distortions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 256-277.
    3. Papanastasopoulos, Georgios & Thomakos, Dimitrios & Wang, Tao, 2011. "Information in balance sheets for future stock returns: Evidence from net operating assets," International Review of Financial Analysis, Elsevier, vol. 20(5), pages 269-282.
    4. Huang, Alan Guoming & Sun, Kevin Jialin, 2019. "Equity financing restrictions and the asset growth effect: International vs. Asian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    5. Artikis, Panagiotis G. & Diamantopoulou, Lydia & Papanastasopoulos, Georgios A. & Sorros, John N., 2022. "Asset growth and stock returns in european equity markets: Implications of investment and accounting distortions," Journal of Corporate Finance, Elsevier, vol. 73(C).
    6. Cakici, Nusret & Zaremba, Adam, 2023. "Recency bias and the cross-section of international stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).
    7. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    8. Watanabe, Akiko & Xu, Yan & Yao, Tong & Yu, Tong, 2013. "The asset growth effect: Insights from international equity markets," Journal of Financial Economics, Elsevier, vol. 108(2), pages 529-563.
    9. Abdoh, Hussein & Varela, Oscar, 2021. "What lies behind the asset growth effect?," Global Finance Journal, Elsevier, vol. 48(C).
    10. Cakici, Nusret & Zaremba, Adam, 2022. "Salience theory and the cross-section of stock returns: International and further evidence," Journal of Financial Economics, Elsevier, vol. 146(2), pages 689-725.
    11. Bartram, Söhnke M. & Grinblatt, Mark, 2021. "Global market inefficiencies," Journal of Financial Economics, Elsevier, vol. 139(1), pages 234-259.
    12. Huang, Yuan & Lam, F.Y. Eric C. & Wei, K.C. John, 2014. "The q-theory explanation for the external financing effect: New evidence," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 69-81.
    13. Jacobs, Heiko, 2016. "Market maturity and mispricing," Journal of Financial Economics, Elsevier, vol. 122(2), pages 270-287.
    14. McLean, R. David & Zhao, Mengxin, 2018. "Cash savings and capital markets," Journal of Empirical Finance, Elsevier, vol. 47(C), pages 49-64.
    15. Christian Walkshäusl & Sebastian Lobe, 2014. "The Alternative Three†Factor Model: An Alternative beyond US Markets?," European Financial Management, European Financial Management Association, vol. 20(1), pages 33-70, January.
    16. Papanastasopoulos, Georgios A. & Tsiritakis, Emmanuel, 2015. "The accrual anomaly in Europe: The role of accounting distortions," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 176-185.
    17. Chou, Pin-Huang & Ko, Kuan-Cheng & Yang, Nien-Tzu, 2019. "Asset growth, style investing, and momentum," Journal of Banking & Finance, Elsevier, vol. 98(C), pages 108-124.
    18. Luzi Hail & Christian Leuz, 2006. "International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?," Journal of Accounting Research, Wiley Blackwell, vol. 44(3), pages 485-531, June.
    19. Lin, Qi, 2017. "Noisy prices and the Fama–French five-factor asset pricing model in China," Emerging Markets Review, Elsevier, vol. 31(C), pages 141-163.
    20. Teresa Chu & In-Mu Haw & Bryan Lee & Woody Wu, 2014. "Cost of equity capital, control divergence, and institutions: the international evidence," Review of Quantitative Finance and Accounting, Springer, vol. 43(3), pages 483-527, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:intfin:v:47:y:2017:i:c:p:188-210. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/intfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.