Hellenic Open University Conferences, International Conference on Business & Economics of the Hellenic Open University 2015

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Managerial Discretion, Net Operating Assets and the Cross-Section of Stock Returns in Europe
Georgios Papanastasopoulos, Dimitrios Thomakos

Building: Titania
Room: Niki
Date: 2015-02-06 03:00 PM – 04:45 PM
Last modified: 2015-01-27


In this paper, we find a negative relation of NOA (net operating assets) with future returns in nine out of sixteen European countries. Return predictability is concentrated across equity markets with the lower level of transaction costs.  Hedge NOA portfolios in these equity markets earn positive returns but lower in magnitude than their respective counterparts in U.S. The negative relation between NOA and subsequent returns is strongly linked with cross-country variation in factors capturing managerial discretion. In particular, it is more likely to occur and be stronger in countries with higher individualism, greater stock-market development, higher competitiveness, lower ownership concentration and better accounting standards. We also show that once returns are adjusted for risk, the magnitude of returns obtained from hedge NOA portfolios is substantially attenuated and becomes significant only in three European countries. Overall, our evidence suggests that optimal investment by executives, in response to discount rate changes, could be an underlying source of return predictability attributable to NOA in Europe.


Net operating assets, Stock returns, Managerial discretion, European equity markets.