Empirical Finance Research Newsletter, June 2009 (plus Stock Screen Results)
Our partners Wesley R. Gray of the University of Chicago and Andrew E. Kern of the University of Missouri present:
June 2009 — Empirical Finance Research Newsletter on The Asset Growth Effect in Stock Returns, a paper by Michael J. Cooper, Huseyin Gulen and Michael Schill
Abstract: We document a strong negative relationship between the growth of total firm assets and subsequent firm stock returns using a broad sample of U.S. stocks. Over the past 40 years, low asset growth stocks have maintained a return premium of 20% per year over high asset growth stocks. The asset growth return premium begins in January following the measurement year and persists for up to five years. The firm asset growth rate maintains an economically and statistically important ability to forecast returns in both large capitalization and small capitalization stocks. In the cross-section of stock returns, the asset growth rate maintains large explanatory power with respect to other previously documented determinants of the cross-section of returns (i.e., size, prior returns, book-to-market ratios). We conclude that risk-based explanations have some difficulty in explaining such a large and consistent return premium.
Conclusions: This is a remarkably simple investment strategy, yet sometimes in investing it is the simplest strategies that make the most sense. Although the results in this paper are outstanding, they are not all that surprising. An analysis of the tables suggests that the returns here are likely driven by exposure to small stocks and value stocks, which we already know outperform over long periods. However these results appear to go above and beyond those which might be explained by size and value factors. Nevertheless, the simplicity and remarkable consistency in annual outperformance for this strategy suggest it should be part of any quantitative investor's toolbox.