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On the Scope and Drivers of the Asset Growth Effect

Published online by Cambridge University Press:  14 November 2011

Marc L. Lipson ,
Sandra Mortal  and
Michael J. Schill
Marc L. Lipson
Affiliation:
Darden Graduate School of Business Administration, University of Virginia, Box 6550, Charlottesville, VA 22906. mlipson@virginia.edu, and schill@virginia.edu
Sandra Mortal
Affiliation:
Fogelman College of Business and Economics, University of Memphis, 236 Fogelman College Admin. Bldg., Memphis, TN 38152. scmortal@memphis.edu
Michael J. Schill
Affiliation:
Darden Graduate School of Business Administration, University of Virginia, Box 6550, Charlottesville, VA 22906. mlipson@virginia.edu, and schill@virginia.edu
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Abstract

Recent papers have debated whether the negative correlation between measures of firm asset growth and subsequent returns is of little importance since it applies only to small firms, is justified as compensation for risk, or is evidence of mispricing. We show that the asset growth effect is pervasive, and evidence to the contrary arises due to specification choices; that one measure of asset growth, the change in total assets, largely subsumes the explanatory power of other measures; that the ability of asset growth to explain either the cross section of returns or the time series of factor loadings is linked to firm idiosyncratic volatility (IVOL); that the return effect is concentrated around earnings announcements; and that analyst forecasts are systematically higher than realized earnings for faster growing firms. In general, there appears to be no asset growth effect in firms with low IVOL. Our findings are consistent with a mispricing-based explanation for the asset growth effect in which arbitrage costs allow the effect to persist.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 6 , December 2011 , pp. 1651 - 1682
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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