Agency Problem and Stock Returns: Combining Measures of Asset Growth and Gross Profit

In this paper, we propose a new factor in predicting stock returns, after taking agency problems into account. Although intensive studies have focused on asset growth and profitability as factors future very limited attention has been given to their interaction. We construct measure that combines both scaled gross profit single (defined AGGP, hereafter), by excluding the change capital expenditures from profit. demonstrate our of controls for problem managerial decisions investment. Our results are also robust scaling issues raised recent studies. Further, consistent with prior literature, produces superior full universe CRSP stocks, but inferior when applied subset 500 largest nonfinancial firms. This is fact those firms less affected problem, leading failure returns among subsample. sum, sheds lights how price issues, providing “cleaner” free costs lending supportive evidence mispricing explanation asset-growth effect.