Momentum Pattern of the Growth Anomaly

Abstract

This paper investigates if the growth anomaly, the phenomenon that stocks of firms with lower growth in capital investment expenditures have higher future returns, exhibits the momentum pattern and if it can be explained from behavioral perspectives. We achieve this by decomposing a long-term 3-year investment growth into three consecutive short-term growth measures. The result from a cross-sectional analysis indeed reveals the presence of the momentum pattern in the growth anomaly that can be explained by behavioral theories. Long-term 3-year investment growth is statistically significant in explaining subsequent stock returns, but the first 1-year growth that is closest to the formation affects the returns (and hence is priced by investors) the most, followed by the second and third ones, monotonically. A further investigation shows that the growth anomaly is amplified by limits to arbitrage as measured by the level of idiosyncratic risk. However, the farther growth is less sensitive to the limit-to-arbitrage measure, thereby reiterating the momentum pattern of the growth anomaly.