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.
|Number of pages||23|
|Journal||Journal of International Financial Markets, Institutions and Money|
|Publication status||Published - 1 Mar 2017|
- European equity markets
- Managerial discretion
- Net operating assets
- Stock returns