Rational Asset Pricing or Market Inefficiency: Analysis of the Asset Growth Anomaly in Developed and Emerging European Equity Markets

Abstract

This study advances the understanding of the asset growth anomaly in European equity markets, distinctively using firm-level data instead of the commonly used country-level proxies. It explores the dichotomy between rational and mispricing explanations for this anomaly, employing a nuanced approach to asset growth decomposition and firm losses. Our analysis utilizes data on 24 European nations, divided into Eastern-Southern and Western-Northern regions, with firm accounting data being available from 1996-2020 and firm returns from 1997-2022, encapsulating the COVID-19 health and economic crises, providing an extensive canvas for our study. The findings exhibit a robust asset growth effect within both regions. In established economies of Western-Northern, the asset growth effect appears more consistent with risk-based explanations, particularly within profitable firms. In contrast, the asset growth anomaly within Eastern-Southern, comprising less developed economies, exhibits evidence implying market inefficiencies, in particular within loss-making firms. The investigation reveals that both investment growth and accounting distortion components significantly influence the asset growth effect within dissimilarly developed European economies. These findings withstand diverse sets of analyses, including the exclusion of core markets and through the pandemic period, further demonstrating the relevance of this study.