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The Impact of Firm Growth on Stock Returns of Nonfinancial Firms Listed on Egyptian Stock Exchange

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The Impact of Firm Growth on Stock Returns of Nonfinancial Firms Listed on Egyptian Stock Exchange The Impact of Firm Growth on Stock Returns of Nonfinancial Firms Listed on Egyptian Stock Exchange Ghada Saeed, Suez Canal University, Egypt Saad Metawa, Mansoura University, Egypt Tarek Eldomiaty, Misr International University, Egypt Abstract The main purpose of the research is to investigate whether there is an effect of firm growth on stock returns in Egyptian Stock Exchange. Sample size of the study is 77 firms of nonfinancial firms listed on Egyptian Stock Exchange. The required data were collected from firms’ financial statements from 2010-2014. Firm growth is calculated by four measures which are: Total asset growth, fixed asset growth, Sales revenue growth, and sales weighted fixed asset growth. Stock return is calculated using the appreciation in stock price divided by the original price for each period. Panel model estimation was used in the analysis. Results of the analysis revealed that there is no association between total asset growth and stock returns, there is a negative association between fixed asset growth and stock returns, there is positive association between sales revenue growth and stock returns, and sales weighted fixed asset growth and stock returns. Keywords: Firm growth, Total Asset growth, Sales Revenue growth, Fixed asset growth, Sales-weighted fixed asset growth, stock return, Egyptian Stock Exchange. Introduction Firm growth and decline is the core of finance and economic dynamics. Individual businesses are interested in determining the firm growth because it measures the firm ability to increase sales and expand its operations. Firm growth study is heterogeneous in nature, and the differences are growth indicator, firm growth measures, and differences in processes by which firm growth occurs. Stock market is an important way for firms to raise their fund. It allows firms to be publicly traded and raise fund to expand and spend for their activities. So, the fund firm gets through issuing stocks can be used in growing the firm. But in return investors deserve return. This research examines whether growing the firm affects stock return or not and if found, what is the nature of the relation. Firm growth is very important to be studied; because it affects many items inside and outside the firm. In addition to helping the firm to survive, it affects employment rate because firm growth means more jobs. Growth of the firm can be found in any sector. It means needing innovation especially in electronics sector. It means need more material and parts from other sectors, so it leads to using economies of scale and decreasing average cost of production. It affects market share and increases its market competitiveness. There are many indicators of growth, such as total asset growth, fixed assets growth, sales and revenue, cost, number of employees, stock market value….etc. There is no single way to measure growth, but choosing the appropriate way to measure growth depends on the industry 1 and research questions. Some of these indicators are used as measures of firm growth in the research. This research examines the relation between firm growth and cross section of stock returns. Research population is composed of all nonfinancial firms listed on Egyptian Stock Exchange. Secondary data are extracted from the financial statements of the firms over the period of 2010-2014. Firm growth is measured by four measures: total asset growth rate, fixed assets growth rate, sales revenue growth rate, and sales weighted fixed assets growth rate. Stock return is measured by the appreciation in stock price divided by the price at the beginning of the period. Therefore, this research is going to shed the light on firm growth, its measures, their impact on stock return, and it aims to achieve the following objectives: First: To examine the impact of firm growth rates on stock returns. Second: To measure firm growth rate through calculating total assets growth rate, fixed assets growth rate, sales revenue growth rate and sales-weighted fixed assets growth rate. Third: To measure stock return using appreciation in stock price divided by the original price for each period. Forth: To enrich the literature by a framework of some factors that affect stock returns and this will try to fill the gap of the lack of studies tackling firm growth as an independent variable. Literature Review: 1. Firm growth Firm growth shows how firms behave once they enter the market, their market opportunities and level of efficiency (Carrizosa, 2007). Firm growth has many definitions. It can be defined “in terms of revenue generation, value addition, and expansion in terms of volume of the business”, (Regasa, 2015). According to (Kruger, 2004), firm Growth can be measured in terms of profit, total assets, turnover, net assets, net worth, and increase in number of employees. Firm growth is very important for flourishing the firm. Using financial resources, human resources, and other resources in the firm effectively affect the firm growth rather than other firms. Gupta et al., (2013) explained that Growth-oriented firms are contributors in nation’s economic gain. Firm growth can be defined in terms of resource-based perspective which focuses on firm resources such as business activities expansion, educated staff, financial resources…. Etc. Nelson and winter (1982) define growth as “an organizational outcome resulting from the combination of firm specific resources, capabilities, and routines.” Gupta (1968) defines growth as “the annual percentage change in total assets, sales, and operating profit.” He explains that the financial manager believes that the firm growth is raising firm size and activities in the long run, but on the contrary growth implies expansion of firm sales, profits, and assets because it is important for firm survival, and increasing stockholders equity. Bei and Wijewardana (2012), and Tahir et al., (2013) calculate the growth index of the total assets, profit and sales using the following: 2 Measures of firm growth There are many measurements for firm growth, but this research uses only four which are:- 1. Total asset growth rate Total assets growth rate can be used as a firm growth measure because it captures the aggregate growth of the firm. And any change in subcomponent of assets- investment or disinvestment will lead to change in total assets. Mateev and Anastasou (2010) find that total asset as a measure of firm size affect directly on sales revenue, and amount of capital at starting time, and firm growth strategy are important in anticipating small firm growth. Chen et al., (2008) defined annual firm total asset growth rate as “year-over-year percentage change in total assets”. Cooper et al., (2008),Chen et al., (2008), Titman et al., (2010) and Wang el al., (2015) use the equation:- This research calculates total assets growth by:- 2. Sales revenue growth rate The most valuable overall indicator of change in the firm business prospects is sales revenue growth, (Hirschey & Nofsinger) As known, revenue is income the firm receives from its normal business activities such as sale of goods and services to customers across period of time. Revenue growth is the percentage change in firm revenue between two times of period. It is used to measure how fast firm is expanding, so it can be used as a firm growth measure. In this research, it is calculated by:- 3. Fixed assets growth rate Fixed assets growth or investment combines the acquisition and capital improvement of tangible fixed assets. It is measured as capital spending. It refers to any investment within the measurement period in physical asset, such as real estate, machines,…Etc. those are held for more than one year. Fixed assets growth can be good indicator for how much investment is occurring in the firm. When firm invests in fixed assets, it indicates to the business owners’ ability to earn more in the next year; so it indicates to firm growth. It is useful to study fixed asset investment, because it is easier to measure and easier to compare across firms from different sectors (Dong et al., 2012). It is calculated by:- The researcher will use net fixed assets which means after deducting depreciation. 4. Sales-weighted fixed assets growth 3 Eldomiaty (2010) has introduced a firm growth measure relies on sales-weighted fixed assets growth which is:- He used this measure because it takes into account sales growth and fixed assets at the same time and relates fixed assets growth to maximum sales the firm can achieve. Measure of stock returns Stock return can be measured by formula which is an appreciation in the price plus any dividend paid divided by the original stock price. It as measured as below:- The relation between Total assets growth and stock returns Chen et al., (2008) provided empirical evidence on the impact of firm asset growth on stock returns using data on nine equity markets in the Pacific-Basin region (PACAP). They found that there is a significant negative relation between firms’ asset growth and stock returns subsequently. They explained the reason of low stock return sensitivity to asset growth in PACAP region comparing with US. They found that the asset growth persistence is higher in the region- specifically, in spite of the pattern of decreasing profitability and future growth for firms with high asset growth. Cooper et al., (2008) have examined the firm asset investment level effects on return by examining the relation between firm asset growth and subsequent cross-sectional stock returns. The research showed the capability of asset growth to anticipate the cross-section of returns due to its capability to capture common return effects across the firm’s total investment components or financing activities. The result of research suggests that asset growth leads to relation among firm size, returns, and finance types. They have explored that firm asset growth rate is stronger in determining future returns than other growth measures.
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