Ex-Ante Expection Errors and the Asset Growth Effect

Ex-ante expectation errors play a crucial role in the asset growth anomaly and other investment related anomalies. Our approach suggests an asset growth trading strategy that is more effective than the convention strategy. Our approach also connects several important empirical regularities regarding the asset growth anomaly. Our findings provide a new interpretation of the mispricing argument. On one hand, investors overestimate the future benefit of current asset expansion and hence overvalue expanding firms. On the other hand, investors also overestimate the future harm of current asset contradiction and hence undervalue shrinking firms. This new interpretation is consistent with the recent findings that total asset growth is negatively associated with future analyst earnings forecasts errors.