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The use of asset growth in empirical asset pricing models

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  • Cooper, Michael
  • Gulen, Huseyin
  • Ion, Mihai

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.

Suggested Citation

  • Cooper, Michael & Gulen, Huseyin & Ion, Mihai, 2024. "The use of asset growth in empirical asset pricing models," Journal of Financial Economics, Elsevier, vol. 151(C).
    • Handle: RePEc:eee:jfinec:v:151:y:2024:i:c:s0304405x23001861
    DOI: 10.1016/j.jfineco.2023.103746
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    More about this item

    Keywords

    Anomalies; Factor model; Asset growth; Investment; The q-factor model; Dividend discount model; Overextrapolation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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