Daily Academic Alpha: Sham Strategy or Accounting Alpha?

Daily Academic Alpha: Sham Strategy or Accounting Alpha?

March 16, 2015 Research Insights
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(Last Updated On: January 18, 2017)

What Is behind the Asset Growth and Investment Growth Anomalies?

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.

Asset Growth and Stock Market Returns: A Time-Series Analysis

We examine whether the firm-level asset growth effects documented in Cooper, Gulen, and Schill (2008) extend to the aggregate stock market. We find that aggregate asset growth 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 asset growth is associated with more optimistic analyst forecasts and subsequent downward revisions, as well as greater earnings disappointments. In addition, aggregate asset growth 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 asset growth effects extends to the aggregate level.

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About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, 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 that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.