Is the Growth-Value Anomaly Related to the Asset Growth Anomaly?

42 Pages Posted: 24 Sep 2016 Last revised: 31 Oct 2016

See all articles by Hung Wan Kot

Hung Wan Kot

University of Macau - Department of Finance and Business Economics

FY Eric Lam

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 19, 2016

Abstract

It is well known that the market-to-book equity ratio and total asset growth are negatively associated with future stock returns. Much less known is that the predictabilities are related through the mispricing channel. We show that the growth-value anomaly is governed by ex-ante total asset growth expectation errors, so is the asset growth anomaly. The anomalies are weak when the expectation errors are low and strong when the errors are high. Growth firms with high expectation errors generate low returns and possess strikingly higher distress risk. Gross profitability affects the growth-value anomaly via the expectation errors. Limits to arbitrage exacerbates the effect of the expectation errors on the growth-value anomaly.

Keywords: Market-to-book equity ratio, total asset growth, expectation errors, bankruptcy risk, gross profitability, limits to arbitrage

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

Suggested Citation

Kot, Hung Wan and Lam, Full Yet Eric Campbell, Is the Growth-Value Anomaly Related to the Asset Growth Anomaly? (October 19, 2016). Available at SSRN: https://ssrn.com/abstract=2842516 or http://dx.doi.org/10.2139/ssrn.2842516

Hung Wan Kot

University of Macau - Department of Finance and Business Economics ( email )

Macau

Full Yet Eric Campbell Lam (Contact Author)

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

55/F, Two International Finance Centre,
8 Finance Street, Central
Hong Kong
China

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