The Effects of Cash Flow Uncertainty and Working Capital on Non-Cash Flow Shock Returns

Shokrolah Khajavi,Samaneh Ghoohestani

doi:10.5539/ibr.v8n4p139

Abstract

According to the findings of Elton et al. (1999) study, the stock return consists of several components which among them is the cash flow shock return. This means that in prior research, stock return variable were investigated regardless of cash flow shocks. This study investigated the influence of cash flow uncertainty and working capital on non-cash flow shock returns. In this regard, data were gathered from a sample of companies listed on Tehran Stock Exchange from 2004 to 2013. The research hypotheses were examined by multiple regressions. The research results showed that there is a significant relationship between working capital and non-cash flow shock returns. In addition, there is no significant relationship between cash flow uncertainty and non-cash flow shock returns.

Highlights

To calculate the cost of equity, conventional asset pricing tests apply average realized stock returns
Conventional asset pricing tests that use average realized stock returns as a criterion of expected returns implicitly assume that both realized stock returns on average and expected returns are equal
To investigate the effects of cash flow uncertainty and working capital on non-cash flow shock returns, we use the method that Ogneva (2012) create

Summary

Introduction

To calculate the cost of equity, conventional asset pricing tests apply average realized stock returns. Realized returns include three components: the expected return, the return related to cash flow news, and the return related to discount rate news (Campbell, 1991). Among these constituents, only the expected return represents the firm’s cost of equity. For extended periods of time, historical realized returns not equal to expected returns (Campbell, 1991; Elton, 1999; Ogneva, 2012) These tests that apply average realized returns as a measure for expected returns are biased and the extent of the bias is related to the correlation between future cash flow shocks and the variable

Methods

Results

Conclusion