On the Scope and Drivers of the Asset Growth Effect

68 Pages Posted: 12 Feb 2009 Last revised: 14 Jul 2013

Marc L. Lipson

University of Virginia - Darden School of Business

Sandra Mortal

University of Alabama - Culverhouse College of Commerce & Business Administration

Michael J. Schill

University of Virginia ­ Darden School of Business

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Date Written: January 1, 2009

Abstract

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.

Keywords: Investment; Stock returns; Arbitrage costs; Market efficiency

JEL Classification: G11; G12; G14

Suggested Citation

Lipson, Marc L. and Mortal, Sandra and Schill, Michael J., On the Scope and Drivers of the Asset Growth Effect (January 1, 2009). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming; Darden Business School Working Paper No. 1341298. Available at SSRN: https://ssrn.com/abstract=1341298 or http://dx.doi.org/10.2139/ssrn.1341298

Marc Lars Lipson

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4837 (Phone)
434-243-5021 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/lipson.htm

Sandra Mortal

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States

Michael J. Schill (Contact Author)

University of Virginia ­ Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4071 (Phone)
434-243-7676 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/schill.htm

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