Is the Asset Growth Effect Mispricing or Efficiency: Evidence from Stock Issuance and Buyback Restrictions

• In Event: Financial Accounting and Reporting 2

Abstract

This paper finds that institutional regulations on stock issuances and buybacks can be an explanation to the findings that more efficient stock markets have a more significant asset growth effect. We show that equity financing is one of the most important sources of financing asset growth. In countries with more restrictions on stock issuances and buybacks, financing of asset growth is more difficult to obtain. Consistent with this argument, we find that the cross-sectional dispersion of asset change is significantly smaller in countries with limited stock issuances and buybacks. Consequently, the asset growth effect is much weaker in such countries, and that institutional regulations on stock issuances and buybacks supersede legal system, stock market development, and information transparency in explaining the international asset growth effect.

Authors

• Alan Guoming Huang, University of Waterloo

• Kevin Jialin Sun, St. John's University