Relationship between Stock Return Volatility and Working Capital Accruals: A Real Option-Based Investment Approach

Abstract

The aim of this study was to examine the effects of stock return volatility as indication of environmental uncertainty on working capital accruals. This study is the applied one and uses Ex-Post Facto approach. In this study, according to the real option-based investment approach, it was predicted that high stock return volatility would reduce working capital accruals. A sample of 108 companies listed in the Tehran Stock Exchange in the period 2011 to 2014 has been selected to test the hypothesis. To compute some variables, the data of the years 2010 and 2015 have also been collected. The results showed that there is a negative relationship between the volatility of stock returns and working capital accruals, and financial distress of firms reduces the explanatory power of the relationship. One of the main reasons for reduction of the explanatory power of the negative relationship under financial distress could be the motivation of the transfer of risks by investors. Also, contrary to what was anticipated, high operating cycle does not increase the power of negative relationship between stock return volatility and working capital accruals.

Keywords

• stock return volatility
• working capital accruals
• operating cycle
• financial distress
• real options investment