Behavioral Biases and the Asset Growth Anomaly

Abstract

We find evidence that the asset growth anomaly is due, in part, to investors’ behavioral biases. Two-way sorts based on asset growth and proxies for known behavioral biases (anchoring, recency, nominal price illusion, and lottery-seeking) indicate that the asset growth anomaly is stronger in stocks that investors affected by behavioral biases tend to buy and non-existent or negative in stocks they tend to sell. These results are not explained by limits of arbitrage or investor sentiment and hold in both portfolio analyses and regressions. The evidence suggests that behavioral investors’ attraction to certain stocks drives the asset growth anomaly.