Asset Growth and Stock Returns

Posted: 22 Mar 2005

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

Michael J. Schill

University of Virginia - Darden School of Business

Date Written: March 14, 2005

Abstract

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.

Suggested Citation

Cooper, Michael J. and Gulen, Huseyin and Schill, Michael J., Asset Growth and Stock Returns (March 14, 2005). Available at SSRN: https://ssrn.com/abstract=687184 or http://dx.doi.org/10.2139/ssrn.687184

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

Michael J. Schill

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4071 (Phone)
434-243-7676 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/schill.htm

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