The Use of Asset Growth in Empirical Asset Pricing Models

69 Pages Posted: 28 Aug 2017 Last revised: 22 Nov 2017

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: November 21, 2017

Abstract

We provide evidence that the empirical performance of the new factor models proposed by Hou, Xue, and Zhang (2015) and Fama and French (2015) depends crucially on how their investment factor is constructed. Specifically, we call attention to the fact that, in both models, the investment factor is based on the measure of growth in total assets from Cooper, Gulen, and Schill (2008) and not on what most researchers would view as traditional measures of corporate investment. For both models, we show that there are large decreases in their ability to price the cross-section of returns when the investment factor is instead constructed using the traditional investment measures, or when it is constructed using arguably more complete measures that account for investment in intangibles. Additionally, we do not find a significant decrease in performance when we replace the asset-growth factor with a factor based on growth in noncash current assets or long-term debt (which cannot be complete measures of investment). Our results challenge the idea that traditional investment models can fully account for the explanatory power of the asset-growth factor used in the Hou, Xue, and Zhang (2015) and Fama and French (2015) models.

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

JEL Classification: G12

Suggested Citation

Cooper, Michael J. and Gulen, Huseyin and Ion, Mihai, The Use of Asset Growth in Empirical Asset Pricing Models (November 21, 2017). 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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