External Growth and the Cross Section of Stock Returns
52 Pages Posted: 16 Nov 2015 Last revised: 12 Apr 2017
Date Written: February 12, 2017
Prior research finds expected returns decrease in firm-level total asset growth. This study shows that external growth, measured as asset growth raised from capital markets, has stronger power than total asset growth predicting the cross section of average returns. External growth subsumes the total asset growth effect, and outperforms other measures of firm investments in predicting returns. The profitability of external growth strategies is not explained by well-documented factors (i.e., market, size, value, profitability, investment, and momentum). An external growth factor helps to explain a wide range of anomalies. Especially, it accounts for nearly half of momentum profits.
Keywords: External growth, asset growth effect, asset pricing, factor models
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation