What Explains the Asset Growth Effect in Stock Returns?
What Explains the Asset Growth Effect in Stock Returns?

Author: Marc L. Lipson

Publisher:

Published: 2009

Total Pages: 46

ISBN-13:

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We consider the expanding evidence for a negative correlation between firm asset growth and subsequent stock returns with respect to two rational explanations: compensation for risk and costly arbitrage. We observe that the growth rate in total assets is the dominant asset growth rate variable in explaining the cross-section of stock returns. We show that a factor sensitivity to systematic asset growth does not generate a significant risk premium beyond the simple firm growth effect. We find that firm idiosyncratic volatility, which we use as a measure of the cost of holding a position in the stock per unit of time, explains substantial variation in the asset growth effect in the cross section of returns. Furthermore, time series patterns in alphas and factor loadings related to asset growth are associated with high idiosyncratic risk. Our findings highlight the magnitude of the impact of costly arbitrage on stock returns.

The Asset Growth Effect in Stock Returns
The Asset Growth Effect in Stock Returns

Author: Michael J. Cooper

Publisher:

Published: 2009

Total Pages: 22

ISBN-13:

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We document a strong negative relationship between the growth of total firm assets and subsequent firm stock returns using a broad sample of U.S. stocks. Over the past 40 years, low asset growth stocks have maintained a return premium of 20% per year over high asset growth stocks. The asset growth return premium begins in January following the measurement year and persists for up to five years. The firm asset growth rate maintains an economically and statistically important ability to forecast returns in both large capitalization and small capitalization stocks. In the cross-section of stock returns, the asset growth rate maintains large explanatory power with respect to other previously documented determinants of the cross-section of returns (i.e., size, prior returns, book-to-market ratios). We conclude that risk-based explanations have some difficulty in explaining such a large and consistent return premium.

Asset Growth and the Cross-Section of Stock Returns
Asset Growth and the Cross-Section of Stock Returns

Author: Michael J. Cooper

Publisher:

Published: 2007

Total Pages: 54

ISBN-13:

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We test for firm-level asset investment effects in returns by examining the cross-sectional relation between firm asset growth and subsequent stock returns. As a test variable, we use the year-on-year percentage change in total assets. Asset growth rates are strong predictors of future abnormal returns. Asset growth retains its forecasting ability even on large capitalization stocks, a subgroup of firms for which other documented predictors of the cross-section lose much of their predictive ability. When we compare asset growth rates with the previously documented determinants of the cross-section of returns (i.e., book-to-market ratios, firm capitalization, lagged returns, accruals, and other growth measures), we find that a firm's annual asset growth rate emerges as an economically and statistically significant predictor of the cross-section of U.S. stock returns.

External Growth and the Cross Section of Stock Returns
External Growth and the Cross Section of Stock Returns

Author: Hongtao Li

Publisher:

Published: 2016

Total Pages: 57

ISBN-13:

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"Prior research finds that expected returns decrease in firms' total asset growth. This study shows that the asset growth effect is driven by external growth, the component of growth from external sources. While internal growth is unrelated to expected returns, external growth outperforms total asset growth as well as other growth measures in predicting the cross section of average returns. Indeed, firms with low external growth generate significantly higher returns than those with high external growth even among the largest, most liquid stocks (t > 3.0). Further, controlling for external growth improves the Sharpe ratio of the tangent portfolio spanned by commonly used factors (i.e., size, value, profitability, investment, and momentum), and helps to explain most investment related anomalies. Overall, the evidence suggests that external growth is a robust predictor of the cross section of stock returns."--Page v.

On the Scope and Drivers of the Asset Growth Effect
On the Scope and Drivers of the Asset Growth Effect

Author: Marc L. Lipson

Publisher:

Published: 2020

Total Pages: 68

ISBN-13:

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Recent papers have debated whether the negative correlation between measures of firm asset growth and subsequent returns is of little importance since it applies only to small firms, justified as compensation for risk, or evidence of mispricing. We show that the asset growth effect is pervasive and evidence to the contrary arises due to specification choices; that one measure of asset growth, the change in total assets, largely subsumes the explanatory power of other measures; that the ability of asset growth to explain either the cross section of returns or the time series of factor loadings is linked to firm idiosyncratic volatility; that the return effect is concentrated around earnings announcements; and that analyst forecasts are systematically higher than realized earnings for faster growing firms. In general, there appears to be no asset growth effect in firms with low idiosyncratic volatility. Our findings are consistent with a mispricing-based explanation for the asset growth effect in which arbitrage costs allow the effect to persist.

Asset Growth and the Cross Section of Stock Returns
Asset Growth and the Cross Section of Stock Returns

Author: Georgios Constantinou

Publisher:

Published: 2017

Total Pages:

ISBN-13:

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This paper examines whether firm-level asset investment effects in returns found for U.S. firms occur within the Greek stock market. We find that growth in total assets is strongly negatively related to future stock returns of Greek firms. In fact, the relation remains statistically significant, even when we control for other strong predictors of future returns (i.e., market capitalization and book-to-market ratio). Furthermore, we find that a hedge trading strategy on asset growth rate consisting of a long (short) position in firms with low (high) balance sheet growth generates positive returns, confirming that investment growth has significant predictive power for future returns of Greek listed firms.

Cash Flow News and the Investment Effect in the Cross-Section of Stock Returns
Cash Flow News and the Investment Effect in the Cross-Section of Stock Returns

Author: Mike Qinghao Mao

Publisher:

Published: 2015

Total Pages: 41

ISBN-13:

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This study provides novel evidence that cash flow news quantitatively explains the investment effect in the cross-section of stock returns. The negative return predictability of asset growth, investment growth, and accruals is evident only through the cash flow news component of returns. The cash flow news returns associated with investment-sorted portfolios exhibit a reversal from the pre-formation period to the post-formation period. Such a return reversal is in line with reversals in firm fundamentals and becomes stronger for stocks with higher information uncertainty. Our findings are consistent with the expectational errors hypothesis and fail to support the risk-based explanation for the investment effect.

Dissecting the Asset Growth Anomaly
Dissecting the Asset Growth Anomaly

Author: Fangjian Fu

Publisher:

Published: 2014

Total Pages: 36

ISBN-13:

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Studies have shown that firm asset growth predicts cross-sectional stock returns. Firms that shrink their assets earn superior returns while firms that substantially expand their assets incur poor returns in the following years. I show that the negative asset growth often implies poor operating performance and a high probability subsequently to be delisted from the exchanges and that the high asset growth is primarily fuelled by large external financing. The seemingly superior returns of the negative asset growth portfolios are due to the omission of delisting returns. The poor returns of the high asset growth portfolios coincide with the widely-documented return underperformance of firms that have resorted to debt or equity offerings. Controlling for the delisting bias and the underperformance following large external financing, I do not find an independent effect of asset growth on stock returns.

Quantitative Momentum
Quantitative Momentum

Author: Wesley R. Gray

Publisher: John Wiley & Sons

Published: 2016-10-03

Total Pages: 215

ISBN-13: 111923719X

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The individual investor's comprehensive guide to momentum investing Quantitative Momentum brings momentum investing out of Wall Street and into the hands of individual investors. In his last book, Quantitative Value, author Wes Gray brought systematic value strategy from the hedge funds to the masses; in this book, he does the same for momentum investing, the system that has been shown to beat the market and regularly enriches the coffers of Wall Street's most sophisticated investors. First, you'll learn what momentum investing is not: it's not 'growth' investing, nor is it an esoteric academic concept. You may have seen it used for asset allocation, but this book details the ways in which momentum stands on its own as a stock selection strategy, and gives you the expert insight you need to make it work for you. You'll dig into its behavioral psychology roots, and discover the key tactics that are bringing both institutional and individual investors flocking into the momentum fold. Systematic investment strategies always seem to look good on paper, but many fall down in practice. Momentum investing is one of the few systematic strategies with legs, withstanding the test of time and the rigor of academic investigation. This book provides invaluable guidance on constructing your own momentum strategy from the ground up. Learn what momentum is and is not Discover how momentum can beat the market Take momentum beyond asset allocation into stock selection Access the tools that ease DIY implementation The large Wall Street hedge funds tend to portray themselves as the sophisticated elite, but momentum investing allows you to 'borrow' one of their top strategies to enrich your own portfolio. Quantitative Momentum is the individual investor's guide to boosting market success with a robust momentum strategy.