Firms that expand their assets aggressively subsequently underperform.
Cooper, Gulen & Schill; Titman, Wei & Xie · Journal of Finance · published 2008 · original sample 1968–2003 (reported ≈ +9.0%/yr, t ≈ 4)
Growth of $1 in the long-short strategy, gross of trading and shorting costs. The dashed line marks the year the paper was published — everything to its right is out-of-sample.
$1 in the long-short strategy, gross of costs. Grey = the sample the paper had; blue = everything since.
The comparison the site is built around.
| Window | Return/yr | Vol | Sharpe | t-stat | Max DD |
|---|---|---|---|---|---|
| Paper's sample (1968–2003) | +5.4% | 7.5% | 0.74 | 4.0 | -17% |
| After publication (2009–2026) | -0.0% | 7.3% | 0.03 | 0.1 | -28% |
| Full sample (1963–2026) | +2.7% | 7.2% | 0.41 | 2.9 | -28% |
Is there a risk-adjusted alpha left once you control for the standard factors? Alpha is annualized; t-stats use Newey–West standard errors.
| Model | Alpha/yr | Alpha t | R² | Biggest loadings |
|---|---|---|---|---|
| CAPM (market only) | +4.1% | 4.1 | 0.13 | Mkt-RF -0.17 |
| Fama–French 3-factor | +2.1% | 2.9 | 0.51 | HML +0.45, Mkt-RF -0.10, SMB -0.02 |
| Fama–French 5-factor | 0.0% | 0.0 | 1.00 | CMA +1.00, Mkt-RF +0.00, SMB +0.00 |
| FF5 + momentum * | 0.0% | 0.0 | 1.00 | CMA +1.00, Mkt-RF +0.00, SMB +0.00 |
| FF5 + mom, own factor removed | +2.1% | 2.9 | 0.53 | tests for anything left beyond the other five |
* Investment / asset growth is itself the CMA factor, so its alpha against a model that contains CMA is zero by construction — the informative row is the one with its own factor removed.
Trailing 3-year Sharpe ratio. Long stretches below zero are common.
| 1960s | -1.0%/yr | Sharpe -0.14 |
| 1970s | +6.2%/yr | Sharpe 0.94 |
| 1980s | +5.6%/yr | Sharpe 0.90 |
| 1990s | +0.2%/yr | Sharpe 0.02 |
| 2000s | +6.6%/yr | Sharpe 0.81 |
| 2010s | +0.2%/yr | Sharpe 0.04 |
| 2020s | +0.4%/yr | Sharpe 0.04 |
The q-theory explanation: firms invest more when their cost of capital (expected return) is low, so low-investment firms mechanically have higher expected returns.
Empire-building managers over-invest, and investors are slow to mark down the resulting low-quality growth.
Also in the FF5 model. Overlaps value and profitability heavily. Post-publication returns are noticeably smaller than the 2008 sample.
Long-short = the published Fama–French / Carhart factor return. Value-weighted, US equities, monthly, gross of transaction and shorting costs. The original-paper figures are approximate and annualized for comparison.