Paying Too Much for Growth: What have Investors Missed?
61 Pages Posted: 1 Feb 2017 Last revised: 14 Nov 2017
Date Written: November 1, 2017
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: Suggested Citation