Asset Growth and Stock Returns: Evidence from Taiwan Stock Market
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Abstract
Asset growth has been widely documented to be negatively correlated with stock returns in U.S., Australia, and Asia stock markets. Based on a sample of common stocks from July 1982 to December 2009, we first break down total asset into five investment-related and four financing-related asset growth, and investigate whether the negative relationship exists in Taiwan stock market. We find it is “other asset growth”, rather than “total asset growth”, that explains stock returns in Taiwan. The result is robust with the January seasonality. We further conduct both cross-sectional and time-series tests to examine whether other asset growth is a priced factor. Empirical evidence suggests that asset-pricing models constructed based on other asset growth fail to explain the cross-sectional variation of stock returns, but outperform CAPM and Ku's(2005) four-factor model in time-series tests.
