Purpose: This paper investigates whether the well-documented asset growth anomaly can be related to information uncertainty due to earnings manage ment. Design/Methodology/Approach: We perform both portfolio-based and regression-based analys e s. We employ the 5 Variable Version of the Beneish model (Beneish, 1999) as an earnings management proxy and Piotroski’s (2000) FSCORE as a proxy for firms’ fundamental strength. Findings: Overall, our evidence suggests that the asset growth anomaly can be driven by high asset growth firms, manipulating their accounting figures. Originality: Given the implicit inferences that attribute the phenomenon to earnings management mainly by employing country - level proxies, we provide new insights by em ploying variables measured at the firm level.
Artikis, P. G., Diamantopoulou, L., & Papanastasopoulos, G. A. (2021). New Insights on the Asset Growth Anomaly: Evidence from Europe. The European Journal of Finance, 28, 1867-1891. https://doi.org/10.1080/1351847X.2021.2020145
Artikis, P., Diamantopoulou, L., & Papanastasopoulos, G. (2022). Asset Growth and Stock Returns in European Equity Markets: Implications of Investment and Accounting Distortions. Journal of Corporate Finance, 73, Article ID: 102193. https://doi.org/10.1016/j.jcorpfin.2022.102193
Barton, J., & Simko, P. (2002). The Balance Sheet as an Earnings Management Constraint. The Accounting Review, 77, 1-27. https://doi.org/10.2308/accr.2002.77.s-1.1
Beneish, D. (1999). The Detection of Earnings Manipulation. Financial Analysts Journal, 55, 24-36. https://doi.org/10.2469/faj.v55.n5.2296
Beneish, D., Lee, C. M. C., & Nichols, C. (2013). Earnings Manipulation and Expected Returns. Financial Analysts Journal, 69, 57-82. https://doi.org/10.2469/faj.v69.n2.1
Berk, J. B., Green, R. C., & Naik, V. (1999). Optimal Investment, Growth Options, and Security Returns. Journal of Finance, 54, 1553-1607. https://doi.org/10.1111/0022-1082.00161
Cai, C. X., Li, P., & Zhang, Q. (2019). Overreaction to Growth Opportunities: An Explanation of the Asset Growth Anomaly. European Financial Management, 25, 747-776. https://doi.org/10.1111/eufm.12188
Carlson, M., Fisher, A., & Giammarino, R. (2004). Corporate Investment and Asset Price Dynamics: Implications for the Cross-Section of Returns. Journal of Finance, 59, 2577-2614. https://doi.org/10.1111/j.1540-6261.2004.00709.x
Carlson, M., Fisher, A., & Giammarino, R. (2006). Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long-Run Performance. Journal of Finance, 61, 1009-1034. https://doi.org/10.1111/j.1540-6261.2006.00865.x
Chan, K., Chan, L., Jegadeesh, N., & Lakonishok, J. (2006). Earnings Quality and Stock Returns. Journal of Business, 79, 1041-1082. https://doi.org/10.1086/500669
Chan. L., Karceski, J., Lakonishok, J., & Sougiannis, T. (2008). Balance-Sheet Growth and Predictability of Stock Returns. Working Paper, University of Illinois.
Cherstvy, A. G., Vinod, D., Aghion, E., Chechkin, A. V., & Metzler, R. (2017). Time Averaging, Ageing and Delay Analysis of Financial Time Series. New Journal of Physics, 19, Article ID: 063045. https://doi.org/10.1088/1367-2630/aa7199
Cherstvy, A. G., Vinod, D., Aghion, E., Sokolov, I. M., & Metzler, R. (2021). Scaled Geometric Brownian Motion Features Sub- or Superexponential Ensemble-Averaged, but Linear Time-Averaged Mean-Squared Displacements. New Journal of Physics, 103, Article ID: 062127. https://doi.org/10.1103/PhysRevE.103.062127
Choi, N. Y., & Sias, R. W. (2012). Why Does Financial Strength Forecast Stock Returns? Evidence from Subsequent Demand by Institutional Investors. The Review of Financial Studies, 25, 1550-1587. https://doi.org/10.1093/rfs/hhs001
Chu, J. (2019). Accruals, Investment, and Future Firm Performance. Abacus, 55, 783-809. https://doi.org/10.1111/abac.12177
Collins, W. D., Pungaliya, R. S., & Vijh, M. A. (2017). The Effects of Firm Growth and Model Specification Choices on Tests of Earnings Management in Quarterly Settings. The Accounting Review, 92, 69-100. https://doi.org/10.2308/accr-51551
Cooper, I., & Maio, P. (2019a). Asset Growth, Profitability, and Investment Opportunities. Management Science, 65, 3988-4010. https://doi.org/10.1287/mnsc.2018.3036
Cooper, I., & Maio, P. (2019b). New Evidence on Conditional Factor Models. Journal of Financial and Quantitative Analysis, 54, 1975-2016. https://doi.org/10.1017/S0022109018001606
Cooper, M., Gulen, H., & Schill, M. (2008). Asset Growth and the Cross-Section of Stock Returns. Journal of Finance, 63, 1609-1651. https://doi.org/10.1111/j.1540-6261.2008.01370.x
Dai, L., Dharwadkar, R., Shi, L., & Zhang, B. (2017). The Governance Transfer of Blockholders: Evidence from Block Acquisitions and Earnings Management around the World. Journal of Corporate Finance, 45, 586-607. https://doi.org/10.1016/j.jcorpfin.2017.06.004
Dechow, P. M., Ge, W., Larson, C. R., & Sloan, R. G. (2011). Predicting Material Accounting Misstatements. Contemporary Accounting Research, 28, 17-82. https://doi.org/10.1111/j.1911-3846.2010.01041.x
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1996). Causes and Consequences of Earnings Misstatement: An Analysis of Firms Subject to Enforcement Actions by the SEC. Contemporary Accounting Research, 13, 1-36. https://doi.org/10.1111/j.1911-3846.1996.tb00489.x
Doukakis, L., & Papanastasopoulos, G. (2014). The Accruals Anomaly in the UK Stock Market: Implications of Growth and Accounting Distortions. Journal of International Financial Markets, Institutions & Money, 32, 256-277. https://doi.org/10.1016/j.intfin.2014.06.006
Doukas, J. A., Kim, C. F., & Pantzalis, C. (2002). A Test of the Error-in-Expectations Explanation of the Value/Glamour Stock Returns Performance: Evidence from Analysts’ Forecasts. Journal of Finance, 57, 2143-2165. https://doi.org/10.1111/1540-6261.00491
Fama, E. F., & French, K. R. (1992). The Cross-Section of Expected Stock Returns. Journal of Finance, 47, 427-465. https://doi.org/10.1111/j.1540-6261.1992.tb04398.x
Fama, E. F., & French, K. R. (1993). Common Risk Factors in the Returns on Stocks and Bonds. Journal of Financial Economics, 33, 3-56. https://doi.org/10.1016/0304-405X(93)90023-5
Fama, E. F., & French, K. R. (2006). Profitability, Investment and Average Returns. The Review of Financial Economics, 82, 491-518. https://doi.org/10.1016/j.jfineco.2005.09.009
Fama, E., & French, K. (2008). Dissecting Anomalies. Journal of Finance, 63, 1653-1678. https://doi.org/10.1111/j.1540-6261.2008.01371.x
Goto, S., Wang, Z., & Yan, S. (2020). Net Share Issuance and Asset Growth Effects: The Role of Managerial Incentives. Financial Analysts Journal, 76, 63-81. https://doi.org/10.1080/0015198X.2019.1682427
Grove, H., & Cook, T. (2004). Lessons for Auditors: Quantitative and Qualitative Red Flags. Journal of Forensic Accounting, 5, 131-146.
Hyde, C. E. (2018). The Piotroski F-Score: Evidence from Australia. Accounting & Finance, 58, 423-444. https://doi.org/10.1111/acfi.12216
Ince, O., & Porter, B. (2006). Individual Equity Return Data from Thomson Datastream: Handle with Care. Journal of Financial Research, 29, 463-479. https://doi.org/10.1111/j.1475-6803.2006.00189.x
Kedia, S., & Philippon, T. (2009). The Economics of Fraudulent Accounting. The Review of Financial Studies, 22, 2169-2199. https://doi.org/10.1093/rfs/hhm016
Lakonishok, J., Shleifer, A., & Vishny, R. (1994). Contrarian Investment, Extrapolation, and Risk. Journal of Finance, 49, 1541-1578. https://doi.org/10.1111/j.1540-6261.1994.tb04772.x
Lam, E., & Wei, K. C. (2011). Limits-to-Arbitrage, Investment Frictions, and the Asset Growth Anomaly. Journal of Financial Economics, 102, 127-149. https://doi.org/10.1016/j.jfineco.2011.03.024
Lambertides, N. (2022). Misvaluation and the Asset Growth Anomaly. Abacus, Accounting Foundation, 58, 105-141. https://doi.org/10.1111/abac.12241
Lee, B. B., & Choi, B. (2002). Company Size, Auditor Type, and Earnings Management. Journal of Forensic Accounting, 3, 27-50.
Li, D., & Zhang, L. (2010). Does Q-Theory with Investment Frictions Explain Anomalies in the Cross-Section of Returns? Journal of Financial Economics, 98, 297-314. https://doi.org/10.1016/j.jfineco.2010.06.001
Li, E. X., Livdan, D., & Zhang, L. (2009). Anomalies. Review of Financial Studies, 22, 2973-3004. https://doi.org/10.1093/rfs/hhn111
Lipson, M., Mortal, S., & Schill, M. (2011). On the Scope and Drivers of the Asset Growth Effect. Journal of Financial and Quantitative Analysis, 46, 1651-1682. https://doi.org/10.1017/S0022109011000561
Liu, L. X., Whited, T. M., & Zhang, L. (2009). Investment-Based Expected Return. Journal of Political Economy, 117, 1105-1139. https://doi.org/10.1086/649760
Liu, M. (2019). Accruals, Managerial Operating Decisions, and Firm Growth: Implications for Tests of Earnings Management. Journal of Management Accounting Research, 31, 153-193. https://doi.org/10.2308/jmar-52029
McNichols, M. F., & Stubben, S. R. (2008). Does Earnings Management Affect Firm’s Investment Decisions? The Accounting Review, 83, 1571-1603. https://doi.org/10.2308/accr.2008.83.6.1571
Ng, C. C. A., & Shen, J. (2016). Screen Winners from Losers Using Simple Fundamental Analysis in the Pacifc-Basin Stock Markets. Pacifc-Basin Finance Journal, 39, 159-177. https://doi.org/10.1016/j.pacfin.2016.06.003
Ng, C. C. A., & Shen, J. (2019). Quality Investing in Asian Stock Markets. Accounting & Finance, 60, 3033-3064. https://doi.org/10.1111/acfi.12446
Novy-Marx, R. (2014). Quality Investing. Working Paper, University of Rochester.
Petersen, M. (2009). Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches. Review of Financial Studies, 22, 435-480. https://doi.org/10.1093/rfs/hhn053
Piotroski, J. D. (2000). Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers. Journal of Accounting Research, 38, 1-41. https://doi.org/10.2307/2672906
Skinner, D. J. (1993). The Investment Opportunity Set and Accounting Procedures Choice: Preliminary Evidence. Journal of Accounting and Economics, 16, 407-445. https://doi.org/10.1016/0165-4101(93)90034-D
Skinner, D. J., & Sloan, R. G. (2002). Earnings Surprises, Growth Expectations, and Stock Returns or Don’t Let an Earnings Torpedo Sink Your Portfolio. Review of Accounting Studies, 7, 289-312.
Teoh, S., Welch, I., & Wong, T. (1998a). Earnings Management and the Long-Run Market Performance of Initial Public Offerings. Journal of Finance, 53, 1935-1974. https://doi.org/10.1111/0022-1082.00079
Teoh, S., Welch, I., & Wong, T. (1998b). Earnings Management and the Underperformance of Seasoned Equity Offerings. Journal of Financial Economics, 50, 63-99.
Tikkanen, J., & Äijö, J. (2018). Does the F-Score Improve the Performance of Different Value Investment Strategies in Europe? Journal of Asset Management 19, 495-506. https://doi.org/10.1057/s41260-018-0098-3
Titman, S., Wei, K. C., & Xie, F. (2004). Capital Investments Ad Stock Returns. Journal of Financial and Quantitative Analysis, 39, 677-700. https://doi.org/10.1017/S0022109000003173
Titman, S., Wei, K. C., & Xie, F. (2013). Market Development and the Asset Growth Effect: International Evidence. Journal of Financial and Quantitative Analysis, 48, 1405-1432. https://doi.org/10.1017/S0022109013000495
Turtle, H. J., & Wang, K. (2017). The Value in Fundamental Accounting Information. The Journal of Financial Research, 40, 113-140. https://doi.org/10.1111/jfir.12119
Walkshäusl, C. (2017). Expectation Errors in European Value-Growth Strategies. Review of Finance, 21, 845-870. https://doi.org/10.1093/rof/rfw012
Walkshäusl, C. (2019). The Fundamentals of Momentum Investing: European Evidence on Understanding Momentum through Fundamentals. Accounting & Finance, 59, 831-857. https://doi.org/10.1111/acfi.12462
Wang, Y., Liu, C., Lee, J. S., & Wang, Y. (2015). The Relation between Asset Growth and the Cross-Section of Stock Returns: Evidence from the Chinese Stock Market. Economic Modelling, 44, 59-67. https://doi.org/10.1016/j.econmod.2014.09.016
Watanabe, A., Xu, Y., Yao, T., & Yu, T. (2013). The Asset Growth Effect and Market Efficiency: Insights from International Stock Market. Journal of Financial Economics, 108, 529-563. https://doi.org/10.1016/j.jfineco.2012.12.002
Wei, K., & Xie, F. (2008). Accruals, Capital Investments, and Stock Returns. Financial Analysts Journal, 64, 34-44. https://doi.org/10.2469/faj.v64.n5.5
Wu, J., Zhang, L., & Zhang, X. F. (2010). The Q-Theory Approach to Understanding the Accrual Anomaly. Journal of Accounting Research, 48, 177-223. https://doi.org/10.1111/j.1475-679X.2009.00353.x
Xing, Y. (2008). Interpreting the Value Effect through the Q-Theory: An Empirical Investigation. Review of Financial Studies, 21, 1767-1795. https://doi.org/10.1093/rfs/hhm051
Zhang, X. F. (2007). Accruals, Investment, and the Accrual Anomaly. The Accounting Review, 82, 1333-1363. https://doi.org/10.2308/accr.2007.82.5.1333