What Really Drives the Asset Growth Anomaly? New Evidence Points to Mispricing, Not Risk

The asset-growth anomaly is better explained by nonlinear mispricing corrections in hard-to-value stocks than by compensation for systematic risk.

• Firms at both extremes of asset growth are smaller, younger, more R&D-intensive and more operationally levered, with higher forecast dispersion, larger forecast errors and greater return volatility than firms in the middle.
• These extreme-growth firms also have less institutional ownership, thinner analyst coverage and wider bid-ask spreads, creating conditions in which mispricing is more severe and slower to correct.
• A finite mixture normal regression applied to more than 172,000 firm-year observations from 1963 to 2022 identifies two latent groups; the Bayesian Information Criterion falls by more than 10,000 when moving from one group to two.
• One group has a U-shaped relation between asset growth and next-year returns, while the other has an inverted-U relation; in both cases, asymmetric slopes produce the familiar overall negative relationship.
• The patterns survive adjustment for 10 risk factors, including CMA and mispricing factors, and are stronger among stocks with high idiosyncratic volatility; results also hold across alternative asset-growth measures, decile sorts and three 20-year subperiods.

Takeaway: Low-asset-growth returns may reflect correction of mispricing rather than a durable risk premium, so investors should treat extreme asset growth as a valuation-uncertainty signal and avoid relying on a single linear factor slope.