Growth in Average Firm Size of U.S. Industrial Portfolios and the Cross-Section of Expected Returns

Posted: 10 May 2018 Last revised: 27 May 2018

See all articles by Klaus Grobys

Klaus Grobys

University of Vaasa; University of Jyväskyla

Date Written: April 26, 2018

Abstract

This paper shows that growth in average firm size in U.S. industrial portfolios predicts future growth in average firm size. Moreover, the payoffs of industrial portfolios sorted by growth in average firm size in the previous period increase linearly as we move from lowest to highest growth in average firm size. The spread between highest and lowest growth in average firm size is economically large and cannot be explained by exposures to standard risk factors or the asset growth effect (Cooper, Gulen, and Schill, 2008). Principal component analysis reveals that this growth in average firm size effect is linked to the first principal component. Moreover, stochastic discount factor model analysis shows that the spread is marginal useful for pricing the cross section of U.S. industrial portfolios.

Keywords: asset pricing, industry portfolios, growth in average firm size, risk factor

JEL Classification: G12, G14

Suggested Citation

Grobys, Klaus, Growth in Average Firm Size of U.S. Industrial Portfolios and the Cross-Section of Expected Returns (April 26, 2018). Available at SSRN: https://ssrn.com/abstract=3169134 or http://dx.doi.org/10.2139/ssrn.3169134

Klaus Grobys (Contact Author)

University of Vaasa ( email )

P.O. Box 700
Wolffintie 34
FIN-65101 Vaasa
Finland

University of Jyväskyla ( email )

Jyväskyla
Finland

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