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Paying Too Much for Growth: What have Investors Missed?

61 Pages Posted: 1 Feb 2017 Last revised: 14 Nov 2017

Charlie X. Cai

University of Liverpool Management School

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Peng Li

University of Leeds - Division of Accounting and Finance

Qi Zhang

Durham University

Date Written: November 1, 2017

Abstract

We show that investors do not fully incorporate the potentially negative impact of growth on profitability drivers (Asset Turnover and the Net Profit Margin) when valuing growth and this is the cause of the negative relationship between asset growth and subsequent returns – the asset growth anomaly. We identify an ex ante sensitivity measure of future asset turnover to current asset growth that explains the cross-sectional variations in the asset growth anomaly, when such information is correctly revealed by analysts the anomaly disappears. The use of the ex ante sensitivity measure enables us to differentiate the mispricing explanation from the rational explanation of the phenomenon

Keywords: Limited Attention, Growth Anomaly, Expectation Error, US market, International market

JEL Classification: G1, G12, G14, M4

Suggested Citation

Cai, Charlie X. and Keasey, Kevin and Li, Peng and Zhang, Qi, Paying Too Much for Growth: What have Investors Missed? (November 1, 2017). Leeds University Business School Working Paper No. 17-09. Available at SSRN: https://ssrn.com/abstract=2909659 or http://dx.doi.org/10.2139/ssrn.2909659

Charlie Cai (Contact Author)

University of Liverpool Management School ( email )

University of Liverpool
Liverpool, L69 7ZA
United Kingdom

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

Peng Li

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

Qi Zhang

Durham University ( email )

Old Elvet
Mill Hill Lane
Durham, Durham DH1 3HP
United Kingdom

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