Quarterly Asset Growth, the Cross Section of Stock Returns, and Subjective Beliefs

Abstract

I show that asset growth exhibits substantial quarterly variations within a firm's fiscal year, indicating a potential informational advantage of quarterly asset growth compared to annual asset growth. However, unlike annual asset growth, quarterly asset growth shows no clear relation with subsequent stock returns. This unexpected result arises from the opposing return predictions of individual asset components at the quarterly level, which offset each other when aggregated. Constructing factor portfolios based on quarterly growth of individual asset components uncovers several anomalies not captured by existing models. A monthly-rebalanced factor on quarterly cash growth generates an annualized return of 4.7% (t = 8.2) and a Fama-French five-factor alpha of 4.7% (t = 7.6). For quarterly debt growth, these figures are -5.5% (t = -9.5) and -4.9% (t = -8.7). I argue that investors' belief biases, driven by overreactions to investment rate information, largely explain the return predictability of investment-related asset growth, with empirical evidence supporting this claim.

Keywords: Asset Growth, Investment Rate, Asset Components, Subjective Beliefs