Do Investors Overvalue Firms with Bloated Balance Sheets?

  title={Do Investors Overvalue Firms with Bloated Balance Sheets?},
  author={D. Hirshleifer and K. Hou and S. H. Teoh and Y. Zhang},
  journal={Financial Accounting},
  • D. Hirshleifer, K. Hou, +1 author Y. Zhang
  • Published 2004
  • Economics
  • Financial Accounting
  • If investors have limited attention, then accounting outcomes that saliently highlight positive aspects of a firm's performance will promote high market valuations. When cumulative accounting value added (net operating income) over time outstrips cumulative cash value added (free cash flow), it becomes hard for the firm to sustain further earnings growth. When the balance sheet is 'bloated' in this fashion, we argue that investors with limited attention will overvalue the firm, because naive… CONTINUE READING
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