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Asset Growth and the Cross-Section of Stock Returns

Last Updated on 10 February, 2024 by Rejaul Karim

Michael J. Cooper, Huseyin Gulen, and Michael J. Schill embark on a compelling investigation into the intricate dynamics between asset growth and stock returns in their paper titled “Asset Growth and the Cross-Section of Stock Returns.”

Unveiled in 2007 at the AFA Chicago Meetings, this research seeks to unravel the firm-level investment effects on returns by scrutinizing the interplay between asset growth and subsequent stock performance. The metric under scrutiny is the year-on-year percentage change in total assets. Intriguingly, the findings showcase that asset growth rates wield substantial predictive power over future abnormal returns, holding true even for large capitalization stocks—a domain where other conventional predictors lose their edge.

Comparatively pitted against established determinants of return cross-sections, annual asset growth emerges as a robust and statistically significant harbinger of the U.S. stock returns landscape.

Abstract Of Paper

We test for firm-level asset investment effects in returns by examining the cross-sectional relation between firm asset growth and subsequent stock returns. As a test variable, we use the year-on-year percentage change in total assets. Asset growth rates are strong predictors of future abnormal returns. Asset growth retains its forecasting ability even on large capitalization stocks, a subgroup of firms for which other documented predictors of the cross-section lose much of their predictive ability. When we compare asset growth rates with the previously documented determinants of the cross-section of returns (i.e., book-to-market ratios, firm capitalization, lagged returns, accruals, and other growth measures), we find that a firm’s annual asset growth rate emerges as an economically and statistically significant predictor of the cross-section of U.S. stock returns.

Original paper – Download PDF

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Author

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

Conclusion

In summary, our investigation into firm-level asset investment effects on stock returns sheds light on a powerful predictor—the year-on-year percentage change in total assets. This study, spanning large capitalization stocks, establishes that asset growth rates distinctly forecast future abnormal returns.

Even within this subgroup, traditionally robust predictors lose their edge compared to the enduring forecasting ability of asset growth. When benchmarked against established determinants like book-to-market ratios, firm capitalization, lagged returns, accruals, and other growth metrics, annual asset growth rate emerges as a robust and statistically significant predictor of the cross-section of U.S. stock returns.

This underscores the nuanced influence of asset growth on market dynamics, emphasizing its importance in understanding the intricacies of stock performance.

Related Reading:

The Asset Growth Effect in Stock Returns

The Asset Growth Effect: Insights from International Equity Markets

FAQ

Q1: What is the central focus of the paper “Asset Growth and the Cross-Section of Stock Returns” by Michael J. Cooper, Huseyin Gulen, and Michael J. Schill?
A1: The paper investigates the firm-level investment effects on stock returns by examining the cross-sectional relation between asset growth and subsequent stock returns. The authors focus on the year-on-year percentage change in total assets as a metric and explore the predictive power of asset growth rates on future abnormal returns.

Q2: What key findings does the research reveal regarding the predictive power of asset growth rates?
A2: The findings showcase that asset growth rates are strong predictors of future abnormal returns. Remarkably, this predictive ability holds true even for large capitalization stocks, a category where other established determinants of return cross-sections tend to lose their edge. Annual asset growth rates emerge as a robust and statistically significant predictor of the U.S. stock returns landscape.

Q3: How does the predictive power of asset growth rates compare to other established determinants of return cross-sections?
A3: In comparison to previously documented determinants of the cross-section of returns, such as book-to-market ratios, firm capitalization, lagged returns, accruals, and other growth measures, annual asset growth rates stand out as an economically and statistically significant predictor of the cross-section of U.S. stock returns. This emphasizes the unique and enduring forecasting ability of asset growth in understanding stock performance dynamics.

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