Is all growth created equal? The predictive value of growth strategy

Firms have two main strategies at their disposal to expand operations: organic growth or merger and acquisition. This paper investigates the predictable properties of these growth strategies for forecasts of future growth in net operating assets and the implications for future profitability and market returns.; I expect firms that achieve their growth organically to be very different from firms that achieve their growth via merger and acquisition. While mean reversion predicts that the higher historical rate of acquirers will revert to a central tendency in the future, I find that this effect is so strong that the future rate of growth of organic firms exceeds the future growth rate for acquirers.; This higher future rate of growth also has implications for future profitability (Fairfield et al., 2003a). I find that conditioning on the strategy used to achieve past growth provides information about future profitability beyond the level and change of contemporaneous growth in net operating assets. Organic firms have a constant approximate two percent lower one-year-ahead return on net operating assets yet experience greater future abnormal stock returns. This difference in growth patterns remains robust in additional analysis controlling for industry effects, abnormal growth, positive vs. negative growth cycles, and year effects.; Additionally, consistent with Fairfield et al. (2003a) and Richardson, Sloan, Soliman, and Tuna (2006), the market appears to misprice growth in net operating assets for both organic and acquiring firms, but in opposite directions. I find organic (acquirer) firms have positive (negative) future excess returns.; My contributions to the literature are several. This study empirically documents that the growth strategy used is informative for forecasts of future growth in net operating assets and profitability. I also contribute to the literature examining growth in net operating assets. While there are numerous studies examining the post-acquisition underperformance of acquiring firms, none of these studies compares the growth in net operating assets of acquirers to firms that have never completed an acquisition. Finally, I document that the future underperformance is directly related to how the firm achieved its growth and show how this information can be implemented in a trading strategy.