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