Empirical Research of Asset Growth and Future Stock Returns Based on China Stock Market

Abstract

Extensive research has been done on the return of predictive power of factors related to asset growth and capital investment. However, most of the research was based on U.S. market and generally has shown that growth in assets is negatively related to future stock return. In my paper, a research based on China stock market gives a different answer.
In this paper, first I conduced monthly Fama-MacBeth regressions by regressing monthly stock return on the asset growth-related measures and found that the asset growth related measures demonstrate the ability to predict future stock returns and the two-year total asset growth rates showing the greatest predictive power.
To further assess the return predictability of the two-year asset growth rates and also the profitability of the related trading strategies, I applied a commonly used rank portfolio test and measured the abnormal return for each portfolio of the Fama-French (1993) three –factor model.
In the end, conclusion can be reached that in China market, investors could potentially earn a monthly abnormal return of 0.74%, annualizing it gives an annualized abnormal return of 9.25%.