The use of asset growth in empirical asset pricing models

Michael Cooper, Huseyin Gulen and Mihai Ion

Journal of Financial Economics, 2024, vol. 151, issue C

Abstract: We show that the performance of the new factor models of Hou et al. (2015) and Fama and French (2015) depends crucially on how their investment factor is constructed. Both models use growth in total assets to measure investment. Their ability to price the cross-section of returns decreases significantly when the investment factor is constructed using traditional investment measures, or measures that also account for investment in intangibles. In contrast, we find that factors based on growth in inventory and accounts receivable contain the bulk of the pricing information in the asset growth factor. We show evidence that the superior performance of the asset growth factor seems to be attributable to its ability to capture aggregate shocks to equity financing costs.

Keywords: Anomalies; Factor model; Asset growth; Investment; The q-factor model; Dividend discount model; Overextrapolation (search for similar items in EconPapers)
JEL-codes: G12 G20 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:151:y:2024:i:c:s0304405x23001861

DOI: 10.1016/j.jfineco.2023.103746

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