Bloated Balance Sheets and Stock Returns : Asymmetries between Profit and Loss Firms

We study return predictability attributable to bloated balance sheets in European capital markets and find that the NOA anomaly is more severe across loss years and is significantly attenuated across profit years. A hedge trading strategy on NOA for loss firms generate large raw and abnormal returns that are almost three times higher than the respective returns for profit firms. Our evidence is more likely to be consistent with the hypothesis that low NOA firms may have superior returns relative to high NOA firms due to investors’ inability to make full use of information reported in financial statements