External Financing Anomaly
TRADE-OFFNet cash raised from outside investors can signal weak future profitability or overly optimistic valuation. Aggregating debt and equity financing avoids treating one funding channel in isolation.
| THE STRATEGY | $SPX BUY & HOLD | |
|---|---|---|
| Growth a year (CAGR) | 9.0% | 8.8% |
| Return per unit of risk (Sharpe) | 0.59 | 0.65 |
| Worst fall (max drawdown) | -55.8% | -52.6% |
// GROWTH OF $1, LOG SCALE
Tested on years it never saw (from the split): 10.4% a year against 12.4% for the benchmark; Sharpe 0.60 in the training years, 0.59 after.
After 25 bps of trading costs: 7.9% a year. WITHIN RANDOM
// DECADE BY DECADE
| ERA | STRATEGY | BENCHMARK |
|---|---|---|
| 1990s | 4.6% | 15.8% |
| 2000s | 7.6% | -2.6% |
| 2010s | 13.5% | 11.6% |
| 2020s | 10.4% | 14.1% |
// THE IDEA, AS PUBLISHED
Bradshaw, Richardson & Sloan (2006), Journal of Accounting and Economics · 2006
- Use the cash-flow statement to calculate net cash flow from financing activities, including issuance, repayment, repurchase, and distribution flows.
- Scale net external financing by total assets using information available after the annual report.
- Rank annually; favor net distributors or low-financing firms and avoid or short the highest-financing firms.
A real computation on the QuantGPT warehouse, survivorship-free, walk-forward. Gross returns, no costs except where stated. Past performance is not a promise. Findings, not advice. COMPUTED 2026-09-24 19:41 ON THE QUANTGPT WAREHOUSE: EVERY DELISTED NAME KEPT, FUNDAMENTALS AS FILED. NOT INVESTMENT ADVICE.