Is the Growth-Value Anomaly Related to the Asset Growth Anomaly?

Abstract

It is well known that the market-to-book equity ratio and total asset growth are negatively associated with future stock returns. Much less known is that the predictabilities are related through the mispricing channel. We show that the growth-value anomaly is governed by ex-ante total asset growth expectation errors, so is the asset growth anomaly. The anomalies are weak when the expectation errors are low and strong when the errors are high. Growth firms with high expectation errors generate low returns and possess strikingly higher distress risk. Gross profitability affects the growth-value anomaly via the expectation errors. Limits to arbitrage exacerbates the effect of the expectation errors on the growth-value anomaly.