Total Asset Growth

In their 2008 paper, professors Cooper, Gulen and Schill provided evidence that a firm's assets growth rates are strong predictors of future abnormal returns.

" 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., spin-offs, share repurchases, debt prepayments, and dividend initiations) tend to be followed by periods of abnormally high returns."
Cooper, Gulen & Shill in Asset Growth and the Cross-Section of Stock Returns

In a study on US data during the period 1967-2007, they find that:

  • A hedge portfolio rebalanced annually that is long (short) the stocks of companies with the lowest (highest) percentage growth in total assets over the previous 12 months generates an average annual return of 22%.
  • This asset growth effect is stronger for small capitalization stocks, but is still substantial for large capitalization stocks.
  • The effect is strongest in the month of January.
  • Asset growth rate retains large explanatory power for future stock returns after accounting for firm size, book-to-market ratio and momentum. In fact the asset growth effect is at least as powerful in explaining returns as these other widely used factors.

We calculate asset growth as follows:

Total Asset Growth = ( Total Assets Total Assets y-1 ) - 1

Read the full paper here.