Abstract

http://ssrn.com/abstract=1988585
 
 

References (43)



 


 



Expecting the Unexpected and the Asset Growth Anomaly


F.Y. Eric C. Lam


Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences; Hong Kong University of Science & Technology (HKUST) - Department of Finance

Kuo-Chiang (John) Wei


Hong Kong University of Science & Technology (HKUST) - Department of Finance

March 1, 2016

AFA 2013 San Diego Meetings Paper

Abstract:     
The behavioral finance literature has suggested that both underreaction and overreaction, two seemingly contradictory mechanisms, can explain the total asset growth (TAG) anomaly. Using intangible TAG as a proxy for excessive investment, we show that underreaction in fact plays a relatively minor role. Instead, we find overreaction to be the principal driver of the anomaly when we use more informative fundamentals to construct TAG expectation inconsistency (TAGEI) as a proxy for extrapolative bias. TAGEI also provides a trading strategy that produces stronger returns and higher Sharpe ratios than the strategy based on the original TAG. These returns are even stronger when limits to arbitrage are more severe. TAGEI also helps synthesize other prominent anomalies related to capital investment. Anomalies related to working capital and external equity financing seem to be distinct from those related to capital investment.

Number of Pages in PDF File: 47

Keywords: Total asset growth; overreaction; underreaction; intangible total asset growth; total asset growth expectation inconsistency; corporate investment

JEL Classification: G14, G31, G32, M41, M42


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Date posted: January 20, 2012 ; Last revised: March 9, 2016

Suggested Citation

Lam, F.Y. Eric C. and Wei, Kuo-Chiang (John), Expecting the Unexpected and the Asset Growth Anomaly (March 1, 2016). AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1988585 or http://dx.doi.org/10.2139/ssrn.1988585

Contact Information

Full Yet Eric Campbell Lam (Contact Author)
Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences ( email )
Kowloon Tong, Kowloon
Hong Kong
3411-5218 (Phone)
3411-5585 (Fax)
Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )
Clear Water Bay, Kowloon
Hong Kong
Kuo-Chiang (John) Wei
Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )
Clear Water Bay, Kowloon
Hong Kong
852 358 7676 (Phone)
852 358 1749 (Fax)
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