Paying Too Much for Growth : What have Investors Missed?

Expectation errors, generally defined, have been used by previous studies to show why investors pay too much for growth. In contrast, our study analyses what actual mistakes investors have made and how they could have been avoided. We show that investors ignore the negative impact of growth on asset turnover, a piece of information that is available to them ex ante. The use of an ex ante sensitivity measure enables us to differentiate the mispricing explanation from the rational explanation of the asset growth phenomenon. Our explanation also provides a consistent prediction in the international context