Ex-ante Expectation Errors and the Asset Growth Effect

40 Pages Posted: 20 Jan 2012 Last revised: 22 Dec 2019

See all articles by FY Eric C Lam

FY Eric C Lam

Independent Consultant

K.C. John Wei

Hong Kong Polytechnic University

Date Written: March 1, 2017

Abstract

We measure ex-ante expectation errors by identifying sporadic versus persistent total asset growth ex-ante. Corporate profitability of high (low) asset-growth firms remains inferior (superior) after temporary asset expansion (contraction), hence ex-ante expectation errors are high. Corporate profitability of high (low) asset-growth firms remains superior (inferior) along continual asset expansion (contraction), hence ex-ante expectation errors are low. The asset growth effect is strong when ex-ante expectation errors are high but nonexistent when ex-ante expectation errors are low. Ex-ante expectation errors remain important under value-weighting scheme and the influence is stronger when limits to arbitrage are more severe. Ex-post revision of analyst earnings forecast in an opposite direction to the change in asset size is larger when ex-ante expectation errors are higher. Ex-ante expectation errors uniformly affect return effects associated with a variety of asset change measures based on capital investment activity but they have little effect on return effects related to net working capital and external financing.

Keywords: total asset growth; capital investment; corporate profitability; stock returns

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

Suggested Citation

Lam, Full Yet Eric Campbell and Wei, Kuo-Chiang (John), Ex-ante Expectation Errors and the Asset Growth Effect (March 1, 2017). AFA 2013 San Diego Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1988585 or http://dx.doi.org/10.2139/ssrn.1988585

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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