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The Asset Growth Effect: Insights from International Equity Markets

Last Updated on 10 February, 2024 by Rejaul Karim

In unraveling the intricacies of financial phenomena, Akiko Watanabe, Yan Xu, Tong Yao, and Tong Yu embark on an insightful journey titled “The Asset Growth Effect: Insights from International Equity Markets.” Spanning 58 pages, this research, born from the confluence of international equity markets, mirrors the U.S. evidence with a discerning lens.

The revelation unfolds as firms boasting higher asset growth rates subsequently grapple with diminished stock returns. Interestingly, this inverse correlation gains strength in well-developed capital markets and those where stocks dance to the tunes of efficient pricing.

Remarkably, the asset growth effect appears indifferent to country characteristics, be it the constraints of arbitrage, investor protection, or accounting quality. The evidence weaves a narrative suggesting that the interplay between asset growth and stock return is more attuned to an optimal investment effect than the echoes of over-investment, market timing, or mispricing.

Abstract Of Paper

Firms with higher asset growth rates subsequently experience lower stock returns in international equity markets, consistent with the U.S. evidence. This negative effect of asset growth on returns is stronger in more developed capital markets and markets where stocks are more efficiently priced, but is unrelated to country characteristics representing limits to arbitrage, investor protection, and accounting quality. The evidence suggests that the cross-sectional relation between asset growth and stock return is more likely due to an optimal investment effect than due to over-investment, market timing, or other forms of mispricing.

Original paper – Download PDF

Here you can download the PDF and original paper of The Asset Growth Effect: Insights from International Equity Markets.

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Author

Akiko Watanabe
University of Alberta – School of Business; University of Alberta – Department of Finance and Statistical Analysis

Yan Xu
HKU, Faculty of Business and Economics

Tong Yao
University of Iowa – Henry B. Tippie College of Business

Tong Yu
University of Cincinnati – Department of Finance – Real Estate

Conclusion

In summary, the investigation into the asset growth effect across international equity markets provides valuable insights into stock return dynamics. The study establishes a robust correlation between higher asset growth rates and subsequent lower stock returns, aligning with patterns observed in the U.S. market.

Notably, this negative relationship is more pronounced in well-established capital markets with greater pricing efficiency. However, the absence of significant associations with country-specific factors implies that limits to arbitrage, investor protection, and accounting quality do not substantially influence this phenomenon.

The findings suggest that the observed link between asset growth and stock returns is likely attributed to an optimal investment effect rather than manifestations of over-investment, market timing, or other mispricing mechanisms.

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A Regime-Switching Relative Value Arbitrage Rule

FAQ

Q1: What is the main finding of the research paper “The Asset Growth Effect: Insights from International Equity Markets” by Akiko Watanabe, Yan Xu, Tong Yao, and Tong Yu?
A1: The research reveals a consistent pattern across international equity markets, indicating that firms with higher asset growth rates tend to experience lower stock returns. This finding mirrors evidence observed in the U.S. market and suggests a robust negative correlation between asset growth and subsequent stock returns.

Q2: Does the asset growth effect vary based on the characteristics of different international capital markets?
A2: Yes, the study finds that the negative effect of asset growth on stock returns is more pronounced in well-developed capital markets and markets with higher efficiency in pricing. However, interestingly, the observed correlation is not significantly influenced by country-specific factors such as limits to arbitrage, investor protection, or accounting quality.

Q3: What does the research suggest about the nature of the relationship between asset growth and stock returns?
A3: The evidence suggests that the observed link between asset growth and stock returns is more likely due to an optimal investment effect rather than manifestations of over-investment, market timing, or other mispricing mechanisms. This insight contributes to a nuanced understanding of the dynamics influencing stock return patterns in international equity markets.

You can find many more Research Papers here

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