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Asset Growth and the Cross-Section of Stock Returns

Over the past 15 years, the exchange industry has been in a state of continued flux. Exchanges have demutualised and in most cases become listed, they have consolidated through mergers and acquisitions, and they have become subject to stiff competition from a host of new alternative trading venues. In other words, stock exchanges have become engaged in an intensified competition and are refashioning themselves to meet the challenge. This, in turn, is creating a new reality in exchanges’ role in the capital markets regulatory framework, including with respect to corporate governance. The objective of. | THE JOURNAL OF FINANCE VOL. LXIII NO. 4 AUGUST 2008 Asset Growth and the Cross-Section of Stock Returns MICHAEL J. COOPER HUSEYIN GULEN and MICHAEL J. SCHILL ABSTRACT We test for firm-level asset investment effects in returns by examining the crosssectional 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. One of the primary functions of capital markets is the efficient pricing of real investment. As companies acquire and dispose of assets economic efficiency demands that the market appropriately capitalizes such transactions. Yet growing evidence identifies an important bias in the market s capitalization of corporate asset investment and disinvestment. The findings suggest that corporate events associated with asset expansion i.e. acquisitions public equity offerings public debt offerings and bank loan initiations tend to be followed by periods of abnormally low returns whereas events associated with asset contraction i.e. spinoffs share repurchases debt prepayments and dividend initiations tend to be followed by periods of abnormally high returns.1 In 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 .