Value anomaly The relationship with firms ’ investment and financing flexibility

The study empirically investigates the relationship between the value anomaly and firms’ investment and financing environment. The evidence supports the relevance of investment irreversibility and the value anomaly as suggested in Zhang (2005). The higher the investment irreversibility gap between value and growth firms, the higher the value premium. While the Fama and French three factor model cannot capture the value anomaly at firm level, it is capable of doing so when being conditioned on firms’ investment irreversibility and the business cycle. The study also finds supportive evidence that financial constraint affects the value anomaly through its influence on the relationship between firms’ investment irreversibility and the value anomaly. The value premium is higher among firms with higher financial constraint. Furthermore, supplementing information about financial constraint improves the explanatory power of the conditional Fama and French model with investment irreversibility and the business cycle conditioning variables. JEL Classification: G11, G12, G14