Hostname: page-component-78c5997874-v9fdk Total loading time: 0 Render date: 2024-11-15T01:42:05.452Z Has data issue: false hasContentIssue false
  • English
  • Français

Market Development and the Asset Growth Effect: International Evidence

Published online by Cambridge University Press:  30 September 2013

Sheridan Titman ,
K. C. John Wei  and
Feixue Xie
Sheridan Titman
Affiliation:
sheridan.titman@mccombs.utexas.edu, McCombs School of Business, University of Texas at Austin, 1 University Sta Stop B6600, Austin, TX 78712, National Bureau of Economic Research, and Gerstein Fisher
K. C. John Wei
Affiliation:
johnwei@ust.hk, School of Business and Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
Feixue Xie
Affiliation:
fxie@utep.edu, College of Business Administration, University of Texas at El Paso, 500 W University Ave, El Paso, TX 79968.
Get access Rights & Permissions [Opens in a new window]

Abstract

A number of studies of U.S. stock returns document what is referred to as the investment or asset growth effect. Specifically, firms that increase investment or total assets subsequently earn lower risk-adjusted returns. This study finds substantial cross-country differences in the asset growth effect. In particular, the asset growth effect is stronger in countries with more developed financial markets, but it does not seem to be associated with corporate governance or the costs of trading. Overall, the evidence is consistent with a q-theory where financial market development captures either managers’ willingness or ability to align investment expenditures to the cost of capital, but it is inconsistent with the hypothesis that the asset growth effect is due to bad governance and overinvestment.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 5 , October 2013 , pp. 1405 - 1432
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Anderson, C. W., and Garcia-Feijóo, L.. “Empirical Evidence on Capital Investment, Growth Options, and Security Returns.” Journal of Finance, 61 (2006), 171–194.CrossRefGoogle Scholar
Baker, M.; Stein, J. C.; and Wurgler, J.. “When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms.” Quarterly Journal of Economics, 118 (2003), 969–1006.CrossRefGoogle Scholar
Berk, J. B.; Green, R. C.; and Naik, V.. “Optimal Investment, Growth Options and Security Returns.” Journal of Finance, 54 (1999), 1153–1607.CrossRefGoogle Scholar
Chan, K.; Covrig, V.; and Ng, L.. “What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide.” Journal of Finance, 60 (2005), 1495–1534.CrossRefGoogle Scholar
Chordia, T.; Subrahmanyam, A.; and Tong, Q.. “Trends in Capital Market Anomalies.” Working Paper, available athttp://dx.doi.org/10.2139/ssrn.2029057 (2013).CrossRefGoogle Scholar
Chui, C. W.; Titman, S.; and Wei, K. C.. “Individualism and Momentum around the World.” Journal of Finance, 65 (2010), 361–392.CrossRefGoogle Scholar
Cochrane, J. H. “Production-Based Asset Pricing and the Link between Stock Returns and Economic Fluctuations.” Journal of Finance, 46 (1991), 209–237.Google Scholar
Cochrane, J. H. “A Cross-Sectional Test of an Investment-Based Asset Pricing Model.” Journal of Political Economy, 104 (1996), 572–621.CrossRefGoogle Scholar
Cooper, M. J.; Gulen, H.; and Schill, M. J.. “Asset Growth and the Cross-Section of Stock Returns.” Journal of Finance, 63 (2008), 1609–1651.CrossRefGoogle Scholar
Djankov, S.; La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “The Law and Economics of Self-Dealing.” Journal of Financial Economics, 88 (2008), 430–465.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427–465.Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Value versus Growth: The International Evidence.” Journal of Finance, 53 (1998), 1975–1999.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Dissecting Anomalies.” Journal of Finance, 63 (2008), 1653–1678.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Size, Value, and Momentum in International Stock Returns.” Journal of Financial Economics, 105 (2012), 457–472.CrossRefGoogle Scholar
Fama, E. F., and MacBeth, J.. “Risk, Return and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.CrossRefGoogle Scholar
Griffin, J. M.; Ji, X.; and Martin, J. S.. “Momentum Investing and Business Cycle Risk: Evidence from Pole to Pole.” Journal of Finance, 58 (2003), 2515–2547.CrossRefGoogle Scholar
Hou, K.; Karolyi, G. A.; and Kho, B.. “What Factors Drive Global Stock Returns?” Review of Financial Studies, 24 (2011), 2527–2574.CrossRefGoogle Scholar
Jegadeesh, N., and Titman, S.. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Journal of Finance, 48 (1993), 65–91.CrossRefGoogle Scholar
Jensen, M. “Agency Costs of Free Cash Flow, Corporate Finance, and Takeover.” American Economic Review, 76 (1986), 323–329.Google Scholar
Lam, F. Y., and Wei, K. C.. “Limits-to-Arbitrage, Investment Frictions, and the Asset Growth Anomaly.” Journal of Financial Economics, 102 (2011), 127–149.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “What Works in Securities Laws?” Journal of Finance, 61 (2006), 1–32.CrossRefGoogle Scholar
Li, D., and Zhang, L.. “Does q-Theory with Investment Frictions Explain Anomalies in the Cross-Section of Returns?” Journal of Financial Economics, 98 (2010), 297–314.CrossRefGoogle Scholar
Li, X. N.; Livdan, D.; and Zhang, L.. “Anomalies.” Review of Financial Studies, 22 (2009), 4301–4334.CrossRefGoogle Scholar
Liu, L. X.; Whited, T. M.; and Zhang, L.. “Investment-Based Expected Return.” Journal of Political Economy, 117 (2009), 1105–1139.CrossRefGoogle Scholar
Liu, L. X., and Zhang, L.. “A Model of Momentum.” Working Paper, Hong Kong University of Science and Technology and Ohio State University (2011).Google Scholar
Loughran, T., and Ritter, J.. “The New Issues Puzzle.” Journal of Finance, 50 (1995), 23–52.CrossRefGoogle Scholar
McLean, D.; Pontiff, J.; and Watanabe, A.. “Share Issuance and Cross-Sectional Returns: International Evidence.” Journal of Financial Economics, 94 (2009), 1–17.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Polk, C., and Sapienza, P.. “The Stock Market and Corporate Investment: A Test of Catering Theory.” Review of Financial Studies, 22 (2009), 187–217.CrossRefGoogle Scholar
Pontiff, J., and Woodgate, A.. “Share Issuance and Cross-Sectional Returns.” Journal of Finance, 63 (2008), 921–945.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R.. “The Limits of Arbitrage.” Journal of Finance, 52 (1997), 35–55.CrossRefGoogle Scholar
Titman, S.; Wei, K. C.; and Xie, F.. “Capital Investments and Stock Returns.” Journal of Financial and Quantitative Analysis, 39 (2004), 677–700.CrossRefGoogle Scholar
Titman, S.; Wei, K. C.; and Xie, F.. “Corporate Groups, Capital Investments and Stock Returns in Japan.” International Review of Finance, 9 (2009), 111–131.CrossRefGoogle Scholar
Watanabe, A.; Xu, Y.; Yao, T.; and Yu, T.. “The Asset Growth Effect and Market Efficiency: Insights from International Stock Markets.” Journal of Financial Economics, 108 (2013), 529–563.CrossRefGoogle Scholar