The Asset Growth Anomaly and the Role of Limits to Arbitrage

49 Pages Posted: 11 Feb 2009 Last revised: 17 Sep 2017

See all articles by FY Eric Lam

FY Eric Lam

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

K.C. John Wei

Hong Kong Polytechnic University

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2009

Abstract

Several studies have documented that companies that increase capital investments or grow their total assets subsequently earn substantially lower risk-adjusted returns. While some studies attribute this phenomenon to investors' initial underreactions to overinvestments pursued by managers who are empire building, others attribute it to investors' initial overreactions to shifts in future business prospects implied by asset expansions. This paper examines the role of the limits to arbitrage in the negative effect of capital investment or asset growth on subsequent stock returns. We hypothesize that if the negative effect is due to investors' initial mis-reactions, the effect should be more pronounced when there are more severe limits to arbitrage. Our empirical evidence appears to support our hypothesis.

Keywords: Asset growth, Capital investment, Limits to arbitrage

JEL Classification: G14, G31, M41, M42

Suggested Citation

Lam, Full Yet Eric Campbell and Wei, Kuo-Chiang (John), The Asset Growth Anomaly and the Role of Limits to Arbitrage (January 1, 2009). Available at SSRN: https://ssrn.com/abstract=1340885 or http://dx.doi.org/10.2139/ssrn.1340885

Full Yet Eric Campbell Lam (Contact Author)

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

55/F, Two International Finance Centre,
8 Finance Street, Central
Hong Kong
China

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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