Asset Growth, M&A And Stock Returns

The dynamic change of the composition of enterprise’s assets, caused by the consumption and the creation of investment opportunities, has important influence on stock’s risk-return characteristics. In recent years, the enterprise’s merger and acquisition(M&A) activity is more and more active in the capital market, which leads to the expansion of enterprise assets. Generally speaking, the expansion of assets usually means the consumption of investment opportunities, and is negatively correlated with future returns, however, if the enterprise creates new growth opportunities through M&A, its corresponding assets expansion may cause completely opposite effects.Based on combing the existing research on asset growth, M&A and stock returns, This paper uses the 2211 A-share listed firms in Non-financial industries during 1998 and 2013 in Shanghai and Shenzhen Exchanges as sample, with the method of the Fama & French combination analysis and the Fama & Macbeth two step regression, examines the relationship between asset growth and stock returns at first, further, using the firms in which M&A activities have happened as subsample, we study the M&A effect on stock returns and the interaction effect between asset growth and M&A, then try to provide a rational pricing analysis for the empirical results from the angle of time-varying characteristics of Risk-Return caused by the consumption and creation of growth option.The empirical results show that asset growth which stands for the consumption of investment opportunities has a significant negative effect on expected stock returns, however, M&A, especially continuous M&A, is likely to create new growth opportunities for the enterprise although it leads to the rapid expansion of assets, thus has a positive effect on expected stock returns and weaken the asset growth’s negative impact on stock returns. This paper provides a new evidence for the asset growth, M&A and the interaction effect on stock returns from the angle of rational pricing and the time-varying characteristics of Risk-Return.