Assets Growth and Common Stock Returns in the Nepali Capital Market

Study Overview and Methodology

• Primary Objective: To assess how changes in firm assets influence the variation in expected common stock returns in the Nepali capital market.
• Scope and Data: A balanced panel dataset of $48$ firms over $12$ years (spanning $2010/11$ to $2021/22$), totaling $576$ observations.
• Data Sources: Stock prices and capital gain yields were sourced from the NEPSE (Nepal Stock Exchange) database; asset growth parameters were obtained from individual financial reports.
• Methodological Tools: Descriptive statistics, correlation analysis, and Ordinary Least Square (OLS) multiple regression analysis.
• Sampling Strategy: Stratified and purposive sampling categorized firms into three groups: Banking and Financial Institutions (BFIs), Insurance Companies, and Other Companies.

Asset Growth Decomposition and Models

• Total Assets Growth ($\Delta TA$): Represents the aggregate growth but fails to distinguish which specific asset categories drive stock returns.
• Decomposition Formula:   $\Delta TA = \Delta LA + \Delta CA + \Delta PPE + \Delta OA$
• Variable Definitions:
  • $CGY_{it}$: Capital gain yield for firm $i$ at year $t$.
  • $DY_{it}$: Dividend yield.
  • $TY_{it}$: Total yield ($CGY + DY$).
  • $\Delta LA$: Liquid Asset growth (cash and cash equivalents).
  • $\Delta CA$: Current Assets growth (excluding $LA$).
  • $\Delta PPE$: Property, Plant, and Equipment growth.
  • $\Delta OA$: Other Assets growth (intangible assets, R&D, and financial assets).
• Outlier Control: A dummy variable ($DU_{it}$) was introduced to exclude observations where assets growth exceeded $500\%$, often due to mergers, acquisitions, or further public offerings.

Key Empirical Findings

• Descriptive Statistics:
  • Total assets growth ($TA$) averaged $24.7\%$ ($0.247$) with a standard deviation of $51.2\%$.
  • Other assets growth ($OA$) showed the highest average at $58.8\%$.
• Total Asset Performance: Contrary to global anomalies, higher total assets growth is linked to greater equity returns in the Nepali market.
• Decomposition Results:
  • $\Delta OA$ (Other Assets Growth): The only component with a consistently significant positive impact on common stock returns for the full sample, BFIs, and insurance firms.
  • $\Delta LA$, $\Delta CA$, and $\Delta PPE$: Showed statistically insignificant relationships with common stock returns.
• Industry Specifics: In BFIs, stock returns are positively affected by rapid asset base expansion. In contrast, models for the "Other Companies" group were found to be statistically inappropriate ($F$-test was insignificant).

Discussion and Theoretical Contrast

• The Global Anomaly: Seminal studies like Cooper et al. (2008), Fama & French (2015), and Titman et al. (2004) document a negative association between asset growth and future returns, often attributed to overinvestment or managerial agency problems.
• The Nepali Context: Findings contradict the "asset growth effect" observed in developed markets. In Nepal, asset expansion—specifically in "other assets"—is interpreted by investors as a signal of business expansion and improved future prospects rather than overvaluation.
• Conclusion: The study suggests that emerging markets like Nepal exhibit unique behaviors due to limited information flow and lower market efficiency, requiring context-specific asset pricing models.