The Impact of Financial Inflexibility on Value Anomaly

Document Type : Research Paper

Authors

1 Assistant Prof., Department of Financial, Faculty of Management and Accounting, Farabi Campus, University of Tehran, Iran.

2 Associate Prof., Department of Economic, Faculty of Economic and Social Sciences, University of Bu-Ali Sina University, Hamadan. Iran.

3 PhD. Candidate, Department of Financial Management, Faculty of Management and Accounting, Farabi Campus, University of Tehran, Iran.

Abstract

Objective: The purpose of this study is to determine the effect of financial inflexibility on value anomaly. According to the research literature, three related sources of financial inflexibility have been identified, and we have created a composite inflexibility index, based on the variables of Investment irreversibility, total leverage and financial constraint.
Methods: In order to achieve the research goals, the monthly data of a 450 year - firm has been used during the period from 2008 to 2017. To test the research hypotheses, Fama and French (1993) three-factor Asset Pricing model was used, and by following the Poulsen, Faff and Gray (2013) studies financial inflexibility, the fourth factor has been added to it. In order to investigate the role of financial inflexibility on value anomaly, the above models were used once by using combined data; and once again, it is fitted with a time-series method.
Results: Financial inflexibility has a significant impact on Stock and portfolio risk premium.
Conclusion: 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 the compensation for the risk of financial inflexibility, and Finally, the positive relationship of financial inflexibility factor with inflexible portfolios and negative relationship with flexible portfolios indicates that financial inflexibility independently subjects firms to common shocks.

Keywords

References

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Financial Research Journal
Volume 21, Issue 4
2019
Pages 612-636

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