New insights on the asset growth anomaly: evidence from Europe*

This study provides insights into the well-documented asset growth anomaly using an integrated European stock market sample derived from 21 countries. We assess whether the anomaly in Europe is attributable 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. Moreover, we determine whether it is derived from firms with existing 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 in Europe at the aggregate level are relatively consistent with a risk-based explanation.