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Market Development and the Asset Growth Effect: International Evidence

Published online by Cambridge University Press:  30 September 2013

Sheridan Titman ,
K. C. John Wei  and
Feixue Xie
Sheridan Titman
Affiliation:
sheridan.titman@mccombs.utexas.edu, McCombs School of Business, University of Texas at Austin, 1 University Sta Stop B6600, Austin, TX 78712, National Bureau of Economic Research, and Gerstein Fisher
K. C. John Wei
Affiliation:
johnwei@ust.hk, School of Business and Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
Feixue Xie
Affiliation:
fxie@utep.edu, College of Business Administration, University of Texas at El Paso, 500 W University Ave, El Paso, TX 79968.
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Abstract

A number of studies of U.S. stock returns document what is referred to as the investment or asset growth effect. Specifically, firms that increase investment or total assets subsequently earn lower risk-adjusted returns. This study finds substantial cross-country differences in the asset growth effect. In particular, the asset growth effect is stronger in countries with more developed financial markets, but it does not seem to be associated with corporate governance or the costs of trading. Overall, the evidence is consistent with a q-theory where financial market development captures either managers’ willingness or ability to align investment expenditures to the cost of capital, but it is inconsistent with the hypothesis that the asset growth effect is due to bad governance and overinvestment.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 5 , October 2013 , pp. 1405 - 1432
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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