There is a large body of international literature exploring the statistical and economical significance of the association between various stock characteristics and the cross-section of stock returns. A number of stock characteristics have been identified as important including firm size, book-to-market and momentum. Recently, Cooper, Gulen and Schill (2008) highlight a negative relationship between total asset growth and stock returns in the USA. Australian evidence of stock characteristics and returns is more modest. While variables such as firm size, over-reaction and momentum have been thoroughly explored, research on characteristics requiring financial statement data (such as book-to-market and asset growth) has been severely limited by data availability.
This thesis focuses on the role of total asset growth in the cross-section of stock returns in Australia. It is one of the first studies to utilise the DAFAI database which allows much more comprehensive analysis of characteristics requiring financial statement data. The methodology involves time-series analysis of portfolios formed on annual asset growth rates and cross-sectional regressions at the individual stock level.
When stocks are equally-weighted, the return spread between low and high asset growth portfolios is statistically and economically significant. This finding is robust to risk adjustment using three- and four-factor models, and sub-period analysis. In contrast, the results are less convincing when portfolios are value weighted. The asset growth effect is less apparent across deciles, with the relationship primarily residing in portfolio one and ten which are portfolios dominated by small stocks. The value-weighted results are not robust to sub-period analysis or the use of the four-factor model for risk-adjustment. These results suggest that the asset growth effect in Australia exists predominantly in micro-caps and small firms. Hence, it may not be exploitable in practice.