SUSTAINABLE GROWTH AND STOCK RETURNS

Authors


  • We thank Dave Diltz, Peggy Swanson, Bill Crowder, Po-Hsuan Hsu, participants in the 2008 FMA meetings in Dallas, Texas, participants in the doctoral seminar series held at the University of Texas at Arlington, and especially the referee, Huseyin Gulen, for helpful comments. An earlier draft of this paper appeared in Wikrom Prombutr's doctoral dissertation.

Abstract

We examine relations between sustainable growth and stock returns over 1964–2007. Findings indicate that high sustainable growth firms tend to have low default risk, low book-to-market ratios, and low subsequent returns. Of the four sustainable growth components, we find that the net profit margin is the major determinant of subsequent returns. Results persist after controlling for asset growth and capital expenditure growth. Additional tests indicate that the sustainable growth effect is attributable to risk and not to mispricing.

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