Tangibility, investment irreversibility and asset pricing

Title: Tangibility, investment irreversibility and asset pricing
Creator: Docherty, Paul; Chan, Howard; Easton, Steve
Relation: 22nd Australasian Finance and Banking Conference 2009 (AFBC 2009). Proceedings of the 22nd Australasian Finance and Banking Conference 2009 (Sydney 16-18 December, 2009)
Relation: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1458238
Publisher: Social Science Electronic Publishing
Resource Type: conference paper
Date: 2009
Description: Zhang (2005) and Cooper (2006) provide a theoretical risk-based explanation for the value premium by suggesting a nexus between firms’ book-to-market ratio and investment irreversibility. They argue that unproductive physical capacity is costly in contracting conditions, but provides growth opportunities during economic expansions, resulting in covariant risk between firms’ investment in tangible assets and market-wide returns. This paper uses the Australian accounting environment to empirically test this theory – a test that is not possible using US data. Consistent with the theoretical argument, tangibility is priced in equity returns, and augmenting the Fama and French three-factor model with a tangibility factor increases model explanatory power.
Subject: asset pricing; tangibility of assets; investment irreversibility; Fama-French model
Identifier: uon:8996
Identifier: http://hdl.handle.net/1959.13/919865
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