Comprehending the Growth Effect: Reexamining the Mispricing of Total Asset Growth

Abstract

Asset growth has been shown to be negatively associated with future returns. Cooper, Gulen, and Schill (2008. Asset Growth and the Cross-Section of Stock Returns. Journal of Finance) argue that an aggregation of all asset growth components as total asset (TA) growth leads to the strongest association with future negative returns. Based on their study, the literature now employs TA growth as an umbrella proxy for “the growth effect.” I hypothesize that not all types of growth imply negative future returns. Specifically, I show that growth financed by suppliers is positively associated with future performance and returns. Removing this growth component from TA growth makes it evident that the TA growth anomaly is simply a noisy manifestation of the net operating asset (NOA) growth anomaly. Consequently, I suggest caution when using TA growth to control for the growth effect.