The Role of Financial Inflexibility in Explaining Value Anomaly with Emphasis on the Business Cycle

Partly on the issue that value stocks earn higher returns than growth stocks, there is agreement, but the interpretation of the cause is controversial and there is no clear explanation for this stock feature. According to investment-based asset pricing theory, the financial inflexibility is the reason for expected return of value firms covary more with recessions than the expected returns of growth firms. The present study seeks to determine the effectiveness of the value anomaly of financial inflexibility with attention to the business cycle. In order to achieve the research goals using systematic removal sampling method, the monthly data of 450 year - firm has been used during the period from 2008 to 2017. To test the research hypotheses, regression method using time series and panel data was used. 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 compensate for the risk of financial inflexibility, and Finally, the effect of financial inflexibility on stock risk premium is not constant during the business cycle, and in times of recession, value companies are more exposed to risk of financial inflexibility than growth companies.Partly on the issue that value stocks earn higher returns than growth stocks, there is agreement, but the interpretation of the cause is controversial and there is no clear explanation for this stock feature. According to investment-based asset pricing theory, the financial inflexibility is the reason for expected return of value firms covary more with recessions than the expected returns of growth firms. The present study seeks to determine the effectiveness of the value anomaly of financial inflexibility with attention to the business cycle. In order to achieve the research goals using systematic removal sampling method, the monthly data of 450 year - firm has been used during the period from 2008 to 2017. To test the research hypotheses, regression method using time series and panel data was used. 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 compensate for the risk of financial inflexibility, and Finally, the effect of financial inflexibility on stock risk premium is not constant during the business cycle, and in times of recession, value companies are more exposed to risk of financial inflexibility than growth companies.