Asset growth anomaly in Europe: Do profits and losses matter?

- The asset growth anomaly in Europe is more pronounced across loss firms.
- The asset growth anomaly in Europe is less severe across profit firms.
- The asset growth anomaly in Europe is more likely to be due to mispricing.

This paper investigates whether the well-documented asset growth effect on stock returns exists across both profit and loss firms in European capital markets. We find that the asset growth anomaly is more pronounced across loss firms and is significantly dampened by the inclusion of profit firms in the sample. The raw and abnormal returns earned from a hedge strategy on balance sheet growth for loss firms are almost two times higher than the respective returns for profit firms. Our evidence casts doubt on a risk-based explanation, thereby lending credence to the suggestion that the asset-growth effect is attributable to mispricing.