Abstract
The asset growth effect states that firms with higher asset growth exhibit lower future stock returns. Existing research finds that the effect is stronger in financial markets that are more developed, more transparent and have better legal protection of investors than in markets with less development, transparency and legal protection. We single out equity financing as the dominant driver of asset growth, and provide evidence that institutional regulations on stock issuance and share buyback explain the cross-country differences of the asset growth effect. Institutional restrictions on stock issuances and buyback are negatively associated with the asset growth effect across countries, and supersede variables such as legal system, stock market development, and information transparency in explaining the effect.
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