The Asset Growth Anomaly and the Acquisition Puzzle

Abstract

PURPOSE OF THE STUDY The purpose of my study is to increase present knowledge of a strong and stable stock market anomaly, the asset growth effect and its connection to post-deal acquirer returns. More specifically, focusing on investability, I reveal how the anomaly has changed along the years and assess whether it still offers an opportunity for investors. I then use the anomaly to search for an answer to the acquisition puzzle by matching post-deal acquirer returns to returns of non-acquirers based on asset growth.

DATA AND METHODOLOGY I use data on US companies from the merged CRSP-Compustat database from the years 1982 to 2017. I gather acquisition data from the SDC database, and data on Fama French coefficients and the risk-free rate from Kenneth French’s website. I then construct a total of 54 calendar-time portfolios based on asset growth and acquisition activity, including asset growth-decile portfolios for the basis of my analysis and taking into account lags in information disclosure. I use a zero-investment CME portfolio to capture the asset growth-effect and analyse its connection to the market and the value and size effects. I then use asset-growth matched non-acquirer control portfolios to analyse whether I can explain post-deal acquirer returns based on the asset growth effect. I also construct an “acquisition risk factor” AMNA to further analyse the connections and differences between the two phenomena.

RESULTS I find a significant and strong asset growth effect in the US market, which produces annual returns of 11.6% over the total sample period. I find that the effect is stronger than either the value or the size effect combined. I also find that the effect’s high returns cannot be explained by common risk factors or a propensity for crashing.

Second, I find that asset growth, to a very high extent, explains poor post-deal acquirer returns, but that I cannot exclude the possibility for differences between the two phenomena. Interestingly, I also find that the effect has vanished during the 2010s, but that the connection between asset growth and acquirer returns has persisted, with acquirers performing better than previously. My analysis suggests that this vanishing would be due to the high-liquidity and low-yield market of the last decade, which has allowed companies to more easily meet their required rates of return on investment. The better scalability of modern tech giants may also be to blame for the anomaly’s disappearance.