Paying Too Much for Growth: A Limited Attention Effect

54 Pages Posted: 1 Feb 2017 Last revised: 29 May 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: May 17, 2017

Abstract

Investors have been warned not to pay too much for growth. Yet empirically there is a strong negative relationship between the asset growth of companies and their subsequent stock returns - the asset growth anomaly. In the context of an accounting valuation model, we propose that investors direct their limited attention to asset growth while ignoring the potential negative impact of growth on the two profitability drivers of Asset Turnover and the Net Profit Margin, and this is the reason behind paying too much for growth and hence the anomaly. We present a range of empirical results that are consistent with a limited attention explanation of the asset growth anomaly.

Keywords: Limited Attention, Asset Growth Anomaly, Accounting Valuation Model, US 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: A Limited Attention Effect (May 17, 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 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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