The Use of Asset Growth in Empirical Asset Pricing Models

80 Pages Posted: 28 Aug 2017 Last revised: 21 Aug 2020

See all articles by Michael J. Cooper

Michael J. Cooper

University of Utah - David Eccles School of Business

Huseyin Gulen

Purdue University - Krannert School of Management

Mihai Ion

University of Arizona - Department of Finance

Date Written: August 20, 2020

Abstract

We show that the performance of the new factor models of Hou, Xue, and Zhang (2015) and Fama and French (2015) depends crucially on how their investment factor is constructed. Both models use growth in total assets to measure investment. Their ability to price the cross-section of returns decreases significantly when the investment factor is constructed using traditional investment measures, or more complete measures that account for investment in intangibles. The superior performance of the asset-growth-based models manifests only when the economy is in a highly overextrapolative state. In below-median overextrapolation, the new models fail to outperform prior models.

Keywords: Anomalies, factor model, asset growth, investment, the q-factor model, dividend discount model, overextrapolation

JEL Classification: G12, G20

Suggested Citation

Cooper, Michael J. and Gulen, Huseyin and Ion, Mihai, The Use of Asset Growth in Empirical Asset Pricing Models (August 20, 2020). Available at SSRN: https://ssrn.com/abstract=3026534 or http://dx.doi.org/10.2139/ssrn.3026534

Michael J. Cooper (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Huseyin Gulen

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Mihai Ion

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
5206210737 (Phone)

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