The asset growth return premium and anchoring on the 52‐week high

Abstract

Research shows that year‐over‐year growth in a firm's assets is associated with a negative stock return premium. A possible explanation for this premium is based on mispricing correction, due in part to investors' overvaluation related to investment. In this article, we argue that a correction of any type is more likely to occur when stock prices are further away from their 52‐week high. To the extent that the 52‐week high acts as a viable anchor, when stocks are closer to this anchor, investors might become less inclined to contribute to the typical downward correction for these types of growth firms. In several tests, we find that stocks that are furthest away exhibit the strongest return premium. The return premium, however, begins to disappear as stocks approach their 52‐week high. These results are robust to various risk factors and cross‐sectional tests that include several firm‐specific characteristics.