Are the new factor models an improvement on theoretical grounds? Evidence from decomposing asset growth

Abstract

Contrary to the theoretical foundations of the asset-growth factor in the newer factor models, this study finds that investment level is not the reason asset growth is negatively associated with future stock returns. Instead, the source is investment composition–the division of total investments between those that are on versus those that are off the balance sheet; this division is endogenously linked with uncertainty because accounting standards prohibit highly uncertain investments from appearing on the balance sheet. Additional findings also suggest that the opposite return predictability of tangible and intangible investments are two sides of the same coin.

Keywords: asset growth, investment, five-factor model, q-factor model, anomalies

JEL Classification: G12; G14