What Explains the Asset Growth Effect in Stock Returns?

46 Pages Posted: 23 Mar 2009

See all articles by Marc L. Lipson

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

Multiple version iconThere are 2 versions of this paper

Date Written: March 18, 2009

Abstract

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.

Keywords: Arbitrage risk, Asset Growth, Mispricing, Transaction costs, Holding costs

JEL Classification: G11, G12, G14

Suggested Citation

Lipson, Marc Lars and Mortal, Sandra and Schill, Michael J., What Explains the Asset Growth Effect in Stock Returns? (March 18, 2009). Available at SSRN: https://ssrn.com/abstract=1364324 or http://dx.doi.org/10.2139/ssrn.1364324

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 (Contact Author)

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

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

Michael J. Schill

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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