Asset Growth and Stock Market Returns: A Time-Series Analysis

I examine whether the firm-level total asset growth effect in Cooper, Gulen, and Schill (2008) extends to the aggregate stock market. I find that aggregate asset growth negatively predicts future market returns both in and out-of-sample and this result is robust across G7 countries. I further show that aggregate asset growth contains information about future market returns not captured by traditional macroeconomic variables and other measures of investment or growth. The forecasting ability of asset growth is strongly correlated with its propensity to predict equity issuance timing and growth in cash savings, earnings surprise, and systematic errors in investors' expectations.