External Growth and the Cross Section of Stock Returns

Prior research finds expected returns decrease in firm-level total asset growth. This study shows that external growth, measured as asset growth raised from capital markets, has stronger power than total asset growth predicting the cross section of average returns. External growth subsumes the total asset growth effect, and outperforms other measures of firm investments in predicting returns. The profitability of external growth strategies is not explained by well-documented factors (i.e., market, size, value, profitability, investment, and momentum). An external growth factor helps to explain a wide range of anomalies. Especially, it accounts for nearly half of momentum profits