Authors: Lydia Diamantopoulou, George Papanastasopoulos, Panagiotis Artikis, Ioannis Sorros

Title: What drives the asset growth anomaly in international stock markets: risk or mispricing?

Abstract

The present paper provides insights about the well-documented asset growth anomaly using an integrated European stock market sample from 21 countries. We seek to assess whether the anomaly in Europe can be attributed to risk or mispricing. In doing so, we examine whether the asset growth effect on stock returns is dependent on the valuation signals contained in equity financing activities, and whether it is derived from firms with existent market expectation errors. Finally, we explicitly test whether asset growth is a priced risk factor using the common two-stage cross-sectional regression (2SCSR) methodology. Overall, our evidence suggests that the underlying origins of the asset growth anomaly are more likely to be consistent with a risk-based explanation.