Paying Too Much for Growth: What have Investors Missed?

64 Pages Posted: 1 Feb 2017 Last revised: 21 Feb 2018

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: February 17, 2018

Abstract

Expectation errors, generally defined, have been used by previous studies to show why investors pay too much for growth. In contrast, our study analyses what actual mistakes investors have made and how they could have been avoided. We show that investors ignore the negative impact of growth on asset turnover, a piece of information that is available to them ex ante. The use of an ex ante sensitivity measure enables us to differentiate the mispricing explanation from the rational explanation of the asset growth phenomenon. Our explanation also provides a consistent prediction in the international context.

Keywords: Limited Attention, Investment 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? (February 17, 2018). 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 Xiaowu 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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