Is there a priced risk factor associated with conservatism?
Research output: Journal Publications and Reviews (RGC: 21, 22, 62) › 21_Publication in refereed journal › peer-review
Author(s)
Detail(s)
Original language | English |
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Pages (from-to) | 545-561 |
Journal / Publication | Journal of Risk Finance |
Volume | 17 |
Issue number | 5 |
Online published | 21 Nov 2016 |
Publication status | Published - 2016 |
Externally published | Yes |
Link(s)
Abstract
Purpose - García Lara et al. (2011) argue that there is a conservatism-related priced risk factor in US stock returns. To put this to the test, the authors aim to analyze whether the conditional conservatism effect comes from the loading on a conditional conservatism-related factor-mimicking portfolio (systematic risk) or the conservatism characteristic itself.
Design/methodology/approach - The authors form characteristic-balanced portfolios from dependent sorts of stocks on the firm’s degree of conservatism and the firm’s loading on the conservatism-related factor-mimicking portfolio as proposed by Daniel and Titman (1997) and Davis et al. (2000).
Findings - The tests indicate that it is the conditional conservatism characteristic rather than the factor loading that explains the cross-sectional differences in average stock returns. Consequently, they do not find evidence for a conservatism-related priced risk factor.
Originality/value - This finding suggests that investors misvalue the conservatism characteristic and casts doubt on the rational risk explanation as proposed by García Lara et al. (2011).
Design/methodology/approach - The authors form characteristic-balanced portfolios from dependent sorts of stocks on the firm’s degree of conservatism and the firm’s loading on the conservatism-related factor-mimicking portfolio as proposed by Daniel and Titman (1997) and Davis et al. (2000).
Findings - The tests indicate that it is the conditional conservatism characteristic rather than the factor loading that explains the cross-sectional differences in average stock returns. Consequently, they do not find evidence for a conservatism-related priced risk factor.
Originality/value - This finding suggests that investors misvalue the conservatism characteristic and casts doubt on the rational risk explanation as proposed by García Lara et al. (2011).
Research Area(s)
- Conservatism, Mispricing, Risk
Citation Format(s)
Is there a priced risk factor associated with conservatism? / Lopatta, Kerstin; Canitz, Felix; Fieberg, Christian.
In: Journal of Risk Finance, Vol. 17, No. 5, 2016, p. 545-561.
In: Journal of Risk Finance, Vol. 17, No. 5, 2016, p. 545-561.
Research output: Journal Publications and Reviews (RGC: 21, 22, 62) › 21_Publication in refereed journal › peer-review