Information content of asset growth for future firm performance
Αξιολόγηση του πληροφοριακού περιεχομένου της ανάπτυξης του ενεργητικού για την μελλοντική εταιρική επίδοση
KeywordsAsset growth effect ; Accounting distortions ; Risk ; Mispricing
The asset growth anomaly and the associated asset growth factor has emerged as a key feature of modern empirical asset pricing models. Although, extensive evidence exists on the robustness of the asset growth anomaly globally, consensus has not yet reached on what causes the irregularity. Existing literature describes two major channels that can drive this negative relation between asset growth and future stock returns: one suggests some form of mispricing and the other is more consistent with rationality. To investigate whether the asset growth anomaly is due to mispricing, we extrapolate the methodological frameworks of Bali et al. (2010) and Piotroski and So (2012) on the value- growth puzzle. Then, to explicitly test whether asset growth is a priced risk factor, we employ the common two-stage cross-sectional regression methodology (Gray and Johnson, 2011). Overall, our findings seem to be consistent with a rational based explanation about the asset growth anomaly in Europe. Because asset growth is the sum of the subcomponents of growth from the left- or right- hand side of the balance sheet, one could argue that some components of total asset growth are subject to managerial accounting discretion. Barton and Simko (2002) argue that the balance sheet records all past accounting choices, so the level of assets can then reflect past earnings management. Thus, the natural question that rises is: Are there any driving forces that can contribute to balance sheet growth other than real investment growth? Indeed, growth in balance sheet accounts may be driven by accounting distortions and/or reduced efficiency (Richardson et al. 2006; Doukakis and Papanastasopoulos, 2014; Watanabe et al. 2013). To that end, we employ and adjust Richardson et al.’s (2006) accrual decomposition, to account for the asset growth anomaly. Finally, in line with Doukakis and Papanastasopoulos (2014), we investigate how the growth and efficiency components of total assets growth could be related to future stock returns. Using regression- and portfolio-based analysis, we show that both asset growth components contribute to the negative relationship between asset growth and stock returns. Hedge portfolios formed on the magnitude of either the growth component or accounting distortions and/or the efficiency component generate large positive and highly significant monthly size adjusted stock returns. We also show that neither component subsumes nor dominates the other in predicting future returns. Notably, accounting- and growth-based factors appear to complement each other in driving the asset growth effect. From our cross-sectional regression analysis based on country-level characteristics, we show that the predictive ability of the growth component for future returns is stronger in countries with higher degree of market efficiency, weaker barriers to arbitrage and less managerial discretion over earnings. Market development, trading volume, analyst activity, transaction costs and earnings management demonstrate the most reliable impact on the predictability of stock returns attributable to the growth component. These findings suggest that the effect of the component that captures investment growth on stock returns is more likely to be due to rationality. The predictive ability of the efficiency component for future returns is found stronger in countries with lower degree of market efficiency, stronger barriers to arbitrage, weaker corporate governance and more managerial discretion over earnings. The evidence from cross-sectional regression tests reveals that almost all country-level proxies under consideration (market development is the only exception), exhibit a reliable impact on the predictability of stock returns attributable to the efficiency component. These findings suggest that the effect of the component that captures accounting distortions and/or reduced efficiency on stock returns is more likely to be due to mispricing. Overall, our country-level-characteristics analysis suggests that the asset growth anomaly can be probably attributable to a mixture of both rational and mispricing explanations, validating the ongoing debate in the existing literature behind its drivers.