Download this Paper Open PDF in Browser

Ex-Ante Expection Errors and the Asset Growth Effect

40 Pages Posted: 20 Jan 2012 Last revised: 19 Mar 2017

F.Y. Eric C. Lam

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences

K.C. John Wei

Hong Kong University of Science & Technology (HKUST) - Department of Finance

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, F.Y. Eric C. and Wei, K.C. John, Ex-Ante Expection 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

Full Yet Eric Campbell Lam (Contact Author)

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences ( email )

Kowloon Tong, Kowloon
Hong Kong
3411-5218 (Phone)
3411-5585 (Fax)

Kuo-Chiang (John) Wei

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

School of Accounting and Finance
Hong Kong Polytechnic University
Hung Hom, Kowloon
Hong Kong
852 2766 4953 (Phone)
852 2330 9845 (Fax)

Paper statistics

Downloads
626
Rank
34,036
Abstract Views
3,427