Key Takeaways
- • Asset growth anomaly may reflect mispricing rather than genuine risk premium: A July 2026 study by Zhuo Cheng, Daniel Cohen, and Jing Fang directly challenges the risk-based rational explanation long accepted by the Fama-French five-factor and Hou-Xue-Zhang q-factor models.
- • Mispricing component exhibits nonlinear relationship with asset growth: The research identifies that return predictability from the asset growth factor stems primarily from price correction (U-shaped or inverted-U function) rather than compensation for systematic risk exposure.
- • Conventional investment measures undermine model explanatory power: Prior 2024 research by Michael Cooper, Huseyin Gulen, and Mahai Ion demonstrated that both leading benchmark models lose significant explanatory power when investment factors are constructed from conventional or intangibles-inclusive measures, with inventory and accounts receivable growth containing the bulk of pricing information.
- • Implications for factor-based investing strategies: If mispricing drives the asset growth factor rather than risk, this challenges the theoretical foundation underlying two of the most widely adopted factor models used in portfolio construction and risk management across the industry.
Summary
The asset growth anomaly—the empirical observation that firms with high asset growth subsequently underperform those with low asset growth—ranks among the most documented patterns in cross-sectional equity returns. This phenomenon has become so influential that it now serves as a cornerstone of two dominant benchmark factor models: the Fama-French five-factor model (via the conservative-minus-aggressive, or CMA, factor) and the Hou-Xue-Zhang q-factor model (via its investment factor).
The conventional wisdom has long rested on rational, risk-based explanations. Fama and French posit that asset growth proxies for expected book equity growth, which the dividend discount model suggests should correlate with lower expected returns when holding other variables constant. Hou, Xue, and Zhang ground their framework in q-theory, arguing that firms invest less when capital costs are elevated, making low investment a signal of high discount rates and vice versa. These theoretical foundations have underpinned widespread adoption of asset growth factors in institutional portfolio management and academic asset pricing research.
New research challenges this risk-based narrative. A July 2026 study authored by Zhuo Cheng, Daniel Cohen, and Jing Fang titled "What drives the Asset Growth-return Relation: Mispricing or Risk?" presents evidence that the mispricing component—not systematic risk—dominates return predictability in the asset growth factor. Critically, this mispricing exhibits a nonlinear relationship with asset growth, following either a U-shaped or inverted-U pattern. This distinction matters substantially: if return predictability stems from price correction rather than risk compensation, it reframes how institutional investors should interpret and deploy asset growth strategies.
The study builds on prior critiques of these models. A 2024 paper by Michael Cooper, Huseyin Gulen, and Mahai Ion demonstrated that both benchmark factor models experience material erosion in explanatory power once investment factors are constructed using more conventional or intangibles-inclusive measures. Their work revealed that growth in inventory and accounts receivable—narrower operational metrics—capture the preponderance of pricing information within the broader asset growth factor. This finding suggests that standard models may be capturing operational inefficiencies or temporary mispricing rather than fundamental risk premiums, a conclusion the 2026 research now directly validates.
The conventional wisdom has long rested on rational, risk-based explanations. Fama and French posit that asset growth proxies for expected book equity growth, which the dividend discount model suggests should correlate with lower expected returns when holding other variables constant. Hou, Xue, and Zhang ground their framework in q-theory, arguing that firms invest less when capital costs are elevated, making low investment a signal of high discount rates and vice versa. These theoretical foundations have underpinned widespread adoption of asset growth factors in institutional portfolio management and academic asset pricing research.
New research challenges this risk-based narrative. A July 2026 study authored by Zhuo Cheng, Daniel Cohen, and Jing Fang titled "What drives the Asset Growth-return Relation: Mispricing or Risk?" presents evidence that the mispricing component—not systematic risk—dominates return predictability in the asset growth factor. Critically, this mispricing exhibits a nonlinear relationship with asset growth, following either a U-shaped or inverted-U pattern. This distinction matters substantially: if return predictability stems from price correction rather than risk compensation, it reframes how institutional investors should interpret and deploy asset growth strategies.
The study builds on prior critiques of these models. A 2024 paper by Michael Cooper, Huseyin Gulen, and Mahai Ion demonstrated that both benchmark factor models experience material erosion in explanatory power once investment factors are constructed using more conventional or intangibles-inclusive measures. Their work revealed that growth in inventory and accounts receivable—narrower operational metrics—capture the preponderance of pricing information within the broader asset growth factor. This finding suggests that standard models may be capturing operational inefficiencies or temporary mispricing rather than fundamental risk premiums, a conclusion the 2026 research now directly validates.
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