Asset Growth and the Cross-Section of Stock Returns

Authors

  • MICHAEL J. COOPER,

  • HUSEYIN GULEN,

  • MICHAEL J. SCHILL

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    • Cooper is with the David Eccles School of Business, The University of Utah. Gulen is with the Krannert Graduate School of Management, Purdue University. Schill is with the University of Virginia – Darden Graduate School of Business Administration. We thank Mike Cliff, Kent Daniel, Naveen Daniel, David Denis, John Easterwood, Wayne Ferson, John Griffin, Ro Gutierrez, Michael Lemmon, Laura Xiaolei Liu, Elena Loutskina, Bill Maxwell, John McConnell, Grant McQueen, Raghu Rau, Jacob Sagi, Paul Simko, Jeff Wurgler, an anonymous referee, the editor (Rob Stambaugh), and seminar participants at BYU, Indiana University, ISCTE, Michigan State University, Purdue University, University of Michigan, University of Porto, University of Virginia, Virginia Tech, and meetings of the American Finance Association, CRSP Forum, and the Financial Management Association for their helpful comments. We thank Dave Ikenberry for providing us with data used in Ikenberry, Lakonishok, and Vermaelen (1995). This paper was previously titled “What best explains the cross-section of stock returns? Exploring the asset growth effect.”


ABSTRACT

We test for firm-level asset investment effects in returns by examining the cross-sectional relation between firm asset growth and subsequent stock returns. Asset growth rates are strong predictors of future abnormal returns. Asset growth retains its forecasting ability even on large capitalization stocks. 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.

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