What lies behind the asset growth effect?

This study finds that changes in total factor productivity (TFP) serve as one of the drivers behind the asset growth effect. Firms increase (decrease) assets when there is an increase (decrease) in TFP. And increases (decreases) in TFP also cause corresponding increases (decreases) in earnings and returns. Subsequently, changes in TFP reverse, which also reverse earnings and returns, leading to the observed asset growth effect. Our results are robust to sorting using the Fama-French five-factor model and momentum factor, and its asset pricing implications, using low-high spread asset growth portfolios with correspondingly low-high spread TFP changes.