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Innovative Capacity and the Asset Growth Anomaly

Praveen Kumar, Bauer College of Business, University of Houston, USA

16th Nov 2012  11:30 am - 12:30 pm Room 214/215, H69 - Economics and Business Building

Innovative capacity (IC) is a firm's ability to produce and commercialize multiple innovations. Expected returns need not fall following asset growth (AG) by high IC firms because investment can generate new growth options. Using patents and citations based IC measures, we find that the well-known negative relation between AG and subsequent excess returns (the "asset growth anomaly") holds only for low IC firms. However, there is no asset growth anomaly for high IC firms and rapid asset expansion in these firms is significantly positively related to future excess returns. Direct tests on the relation of IC to growth options proxies following the asset growth events suggest that asset expansion converts growth options to assets-in-place in low IC firms, while generating new growth options in high IC firms. Our analysis indicates that IC plays an important role in the dynamics between asset growth and stock returns.