Is the Asset Growth Effect Better Described as an Income Statement Effect?

• In Event: Reporting and Disclosure Considerations

Abstract

Cooper, Gulen, and Schill (2010) reported a strong negative relationship between the growth of total firm assets and subsequent firm stock returns that is referred to as the asset growth effect. Their findings show low asset growth stocks earn a return premium over high asset growth stocks. This premium seems to last for five years and to be both statistically and economically significant for large capitalization and small capitalization companies.

Their research does not offer a convincing explanation for why companies invest in assets if that investment leads to a decrease in returns to investors. This may be another case where correlation should not be confused with causality. It is possible that the asset growth effect works because asset investments in one year lead to an increase in sales and an increase in net income in the following year. This research proposal is to examine the hypothesis that the gain to investors from asset growth is positive and caused by an income statement effect which overpowers the asset growth effect.

Authors

• Jim Connell, University of Montevallo

• James Pope, University of Bristol

• David Taylor, The University of Memphis