Existing studies show that firm asset and investment growth predict cross-sectional stock returns. Firms that shrink their assets or investments subsequently earn higher returns than firms that expand their assets or investments. I show that the superior returns of the low asset and investment growth portfolios are due to the omission of delisting returns in CRSP monthly stock return file and that the poor returns of the high asset and investment growth portfolios are largely driven by the subsample of firms that have issued large amounts of debt or equity in the previous year. Controlling for the effects of the delisting bias and external financing, I do not find an independent effect of asset or investment growth on stock returns.
We examine whether the firm-level assetgrowth effects documented in Cooper, Gulen, and Schill (2008) extend to the aggregate stock market. We find that aggregate assetgrowth is a strong negative predictor of future stock market returns. The return predictability is economically large and holds both in and out-of-sample. High aggregate assetgrowth is associated with more optimistic analyst forecasts and subsequent downward revisions, as well as greater earnings disappointments. In addition, aggregate assetgrowth provides complementary power to predict cross-sectional anomalies above and beyond the commonly used measures of investor sentiment. These findings suggest that the behavioral explanation for the firm-level assetgrowth effects extends to the aggregate level.
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016).
Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.
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