Asset growth and the cross-section of stock returns: Evidence from Nordic equity markets

Abstract: We investigate the relationship between firm year-on-year percentage change in total assets and subsequent stock returns in Nordic equity markets. Asset growth rates are strong predictors of future stock returns and hold for firm capitalization. Of particular interest, the asset growth effect is present among large capitalization Nordic stocks. In a sample of big Nordic stocks spanning from 1991 to 2019, the average spread between value-weighted low and high growth portfolios is 8.73% per annum. In Sweden alone, the average spread is 11.75%. The long-short asset growth portfolio for big Nordic stocks has significant nonzero intercepts when measured against three-, four- and six-factor models. On an individual stock level, the asset growth effect remains even when controlling for standard determinants of stock returns. When decomposing total asset growth, we find that certain balance sheet items act as predictors of future stock returns. Finally, a time series analysis reveals that the long-short asset growth portfolio appears to be inversely related to downturns in the overall market.