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Cash Flow and Discount Rate Risk in the Investment Effect: A Downside Risk Approach

Author

Listed:
  • Ehab Yamani

    (Tanta University, Tanta, Egypt2Accounting, Finance, and Entrepreneurship Department, Jackson State University, 1400 John R. Lynch Street, Jackson, MS 39217, USA)

  • David Rakowski

    (Department of Finance and Real Estate, University of Texas at Arlington, 701 S. West Street, Suite 434, P.O. Box 19449, Arlington, TX 76010, USA)

Abstract

We examine whether sensitivities to cash flow and discount rate risk in down markets explain the investment effect, in which low-investment stocks earn higher expected returns than high-investment stocks. We show how productivity and financing constraints asymmetrically impact the systematic risk of low-investment and high-investment firms, conditional on market state. Our evidence is consistent with both productivity constraints and financing constraints as explanations for the investment effect, but, contrary to expectations, more when prices are rising than falling.

Suggested Citation

  • Ehab Yamani & David Rakowski, 2018. "Cash Flow and Discount Rate Risk in the Investment Effect: A Downside Risk Approach," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 1-40, September.
    • Handle: RePEc:wsi:qjfxxx:v:08:y:2018:i:03:n:s2010139218500027
    DOI: 10.1142/S2010139218500027
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