Asset Growth Reversals and Investment Anomalies
F.Y. Eric C. Lam
Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences; Hong Kong University of Science & Technology - Department of Finance
K. C. John Wei
Hong Kong University of Science & Technology (HKUST) - Department of Finance
January 6, 2013
AFA 2013 San Diego Meetings Paper
The negative relation between asset growth or investment and future stock returns mainly comes from high- and low-growth firms that reverse their growth in the future. The negative relation does not exist among firms maintaining similar levels of growth. Controlling for past growth, future stock returns are positively related to realized (and unpredicted) future asset growth and profitability. By contrast, the relation between future returns and predicted future asset growth or profitability is somewhat mixed. Our evidence appears to be more consistent with the explanation of style investing with growth preference and extrapolation bias and the unconditional version of the dynamic q-theory and fails to support the overinvestment explanation, the real options explanation, or the conditional version of the dynamic q-theory.
Number of Pages in PDF File: 53
Keywords: Asset growth, Capital investment, Cross section of stock returns, Net share issuance, Profitability
JEL Classification: G14, G31, G32, M41, M42working papers series
Date posted: January 20, 2012 ; Last revised: March 18, 2013
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