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The Asset Growth Effect in Stock Returns

Last Updated on 10 February, 2024 by Rejaul Karim

In their exploration of financial landscapes, Michael J. Cooper, Huseyin Gulen, and Michael J. Schill present an intriguing inquiry titled “The Asset Growth Effect in Stock Returns,” laid bare in a Darden Business School Working Paper.

Delving into a comprehensive dataset of U.S. stocks, the researchers unveil a robust negative correlation between total firm asset growth and subsequent stock returns. Astonishingly, over four decades, low asset growth stocks maintain a striking 20% annual return premium over their high asset growth counterparts.

This premium unfolds from January after the measurement year and endures for up to five years. Notably, the predictive power of firm asset growth spans both large and small capitalization stocks, surpassing other established determinants in explaining the cross-section of stock returns, challenging conventional risk-based explanations.

Abstract Of Paper

We document a strong negative relationship between the growth of total firm assets and subsequent firm stock returns using a broad sample of U.S. stocks. Over the past 40 years, low asset growth stocks have maintained a return premium of 20% per year over high asset growth stocks. The asset growth return premium begins in January following the measurement year and persists for up to five years. The firm asset growth rate maintains an economically and statistically important ability to forecast returns in both large capitalization and small capitalization stocks. In the cross-section of stock returns, the asset growth rate maintains large explanatory power with respect to other previously documented determinants of the cross-section of returns (i.e., size, prior returns, book-to-market ratios). We conclude that risk-based explanations have some difficulty in explaining such a large and consistent return premium.

Original paper – Download PDF

Here you can download the PDF and original paper of The Asset Growth Effect in Stock Returns.

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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 conclusion, the examination of firm-level asset growth and its impact on stock returns yields a compelling and consistent insight. The study uncovers a substantial negative correlation between total firm asset growth and subsequent stock returns among U.S. equities.

Over the last four decades, equities characterized by low asset growth maintain a substantial return premium of 20% annually compared to those with high asset growth. Notably, this return premium materializes in the January following the measurement year and persists for up to five years. The predictive power of asset growth extends across both large and small capitalization stocks, surpassing other established determinants in the cross-section of stock returns.

This distinctive asset growth effect challenges conventional risk-based explanations, emphasizing its enduring impact on stock market dynamics.

Related Reading:

The Asset Growth Effect: Insights from International Equity Markets

Ex-ante Expectation Errors and the Asset Growth Effect

FAQ

Q1: What is the main focus of the research paper “The Asset Growth Effect in Stock Returns” by Michael J. Cooper, Huseyin Gulen, and Michael J. Schill?
A1: The paper explores the relationship between total firm asset growth and subsequent stock returns using a broad sample of U.S. stocks over the past 40 years. It reveals a strong negative correlation, particularly highlighting a substantial annual return premium of 20% for low asset growth stocks over high asset growth stocks.

Q2: How long does the asset growth return premium persist, and does it vary based on the size of capitalization?
A2: The asset growth return premium begins in January following the measurement year and persists for up to five years. Importantly, this premium is observed in both large and small capitalization stocks, showcasing the enduring impact of asset growth on stock returns across different market segments.

Q3: How does the predictive power of firm asset growth compare to other established determinants of stock returns?
A3: The research finds that the asset growth rate maintains significant predictive power in explaining the cross-section of stock returns. It surpasses other established determinants such as size, prior returns, and book-to-market ratios. This challenges conventional risk-based explanations, suggesting that the asset growth effect plays a crucial role in influencing stock market dynamics.

You can find many more Research Papers here

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