Asset Growth and "Hidden" Return Predictability

Exploring the Predictive Power of Individual Balance Sheet Components

It's time for a new blog post. This week, I explore recent research showing how breaking down total asset growth into individual balance sheet components can reveal new sources of return predictability.

Please note, there won’t be a long-form post next week. Happy Holidays!

Introduction

The investment anomaly, which shows that firms with high annual asset growth tend to underperform those with low annual asset growth, has an interesting nuance when considering quarterly growth rates. Recent research suggests that while total asset growth loses its predictive power on a quarterly basis, growth rates in the individual components of total assets show significant return predictability. Testing this effect using U.S. data, I find that a diversified signal, constructed from the quarterly growth rates of individual balance sheet items, significantly outperforms total asset growth rates.