Asset Growth and Stock Returns
Posted: 22 Mar 2005
Date Written: March 14, 2005
Motivated by both theoretical and empirical work on expected returns and asset growth, we test for a systematic negative relationship between the cross-section of expected returns and a comprehensive measure of asset growth, the year-on-year growth-rate-in-total-assets. Forming portfolios on annual growth rates, we find that firms in the highest decile of growth earn annualized raw returns of approximately 6%, and firms in the lowest decile of growth earn annualized raw returns of approximately 26%, a spread of 20% per year. When we compete asset growth rates with other important determinants of the cross-section of returns (i.e., book-to-market ratios, firm capitalization, and momentum), we find that asset growth has the strongest effect. We propose several explanations as to the underlying cause of the relationship. A firm's annual growth-rate-in-total-assets appears to be the most important variable in predicting the cross-section of US equity returns.
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