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

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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:

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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

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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.
They have documented there is a strong negative relation between firm’s asset growth and
subsequent returns.
They compared the firm asset growth effect with the other cross- section determinants of
returns; they found that asset growth remains stronger.
They examined stock return around earnings announcement. They found that earnings
announcement for low growth firms are related with positive abnormal returns, and earnings
announcement for high growth firms are related with negative abnormal returns.
Asset growth rate has large explanatory power as determinant of cross-section stock return
Cooper et al., (2009). They divided the firms according to percentage change in total assets
into ten portfolios. They were holding portfolios for one year. They concluded that mean
annual portfolio return of stocks with highest past assets growth is lower than mean annual
portfolio returns of stocks with lowest past assets growth. They found that there is a strong
and significant negative relation between subsequent returns and historical asset growth of the
firm.
Lipson et al., (2009) provided empirical evidence on the risk and arbitrage cost explanation
for asset growth effect through series of tests emphasizing two overlapping empirical
questions. First, whether the asset growth effect is limited to stocks with high arbitrage costs

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as predicted by mispricing. Second, whether risk factor premia and time series patterns of risk
factors loading are consistent with explanations based on risk.
They found that the asset growth effect is related to idiosyncratic volatility when they use
multivariate regression. They also found that for stocks with low idiosyncratic risk, there is no
dependable difference in returns across extreme portfolios sorted by asset growth. As
idiosyncratic risk increase, the returns to high growth portfolios decline, and the returns to
low growth portfolios increase.
They explored that the relation between asset growth and subsequent stock returns is negative
in light of two possible explanations: compensation of risk and costly arbitrage. If mispricing
occurs within arbitrage bounds, it does not need violate market efficiency.
Titman et al., (2010) found that there is a negative relation between asset growth and
subsequent stock returns. They explained that there are differences cross-country in asset
growth effect. They found that there is a strong effect of asset growth among developed
countries, but they did not observe any effect among developing countries.
They examined if the asset growth effect variations cross-country is related to cross-country
variations in access to capital, overconfidence, and corporate governance. They found that
asset effect is significantly stronger greater access to capital countries and with more
overconfidence.
They concluded that the variation in asset growth effect between countries may be result of
cross-country differences in access to equity market and cultural environments. They also
found that asset growth effect is too large and permanent in developed markets but not in
developing countries.
Yao et al., (2011) have explored the asset growth effect on stock returns using data on nine
equity markets in Asia, which are Japan, Malaysia, China, Malaysia, Hong Kong, Korea,
Taiwan, Singapore, Malaysia, and Indonesia. They focused in the study on the Asian financial
markets because many Asian firms primarily depend on bank-based financial system in
contrast to U.S. markets. They explained that bank-based system may impact on the firm
financing and investment behavior because they can access to firm financial information and
monitor the firm business performance. Banks also can effectively control the firm
overinvestment. They concluded that there is a wide negative relation between asset growth
and stock returns in the Asian markets during the period from 1981 to 2007. They also found
that future stock return sensitivity to asset growth is significantly lower in Asia relative to
U.S. and that may be a result of relying on bank financing.
Gray et al., (2011) found that there is a negative relation between growth in total asset and
subsequent stock return in Australian stock markets. An equally-weighted portfolio of low
growth big stocks has higher stock return than high growth big stocks portfolio. Also, at
individual stock level of analysis, there is a negative impact of asset growth for big stocks.
They found that the asset growth impact is a result of mispricing. But according to risk-based
explanation, the big spread portfolio abnormal returns are statistically insignificant.
Lie et al., (2012) found that total asset growth rate has the best predictive power for stock
returns using international equity markets. It is strong for most industries, regions, countries,
and different sample periods, and for small and large- cap firms. They also found that the
asset growth impact is significant up to the fourth year after measuring the total asset growth.
They concluded that there is a negative effect of growth in asset/investment on subsequent
stock returns, with two-years total asset growth rates offering the greatest predictive power by
examining data sampled from the international equity markets.
Wen (2013) has used the measure of firm growth in Cooper et al., (2008), which is total
assets growth. By decomposing the total asset growth into major component from both the
financing side and the investment side of the balance sheet, he found that asset growth is
better predictor of cross-sectional returns. From investment decomposition, growth in cash

5
and other assets are significantly and negatively related with future stock market returns.
From financing decomposition, growth in operating liability, equity financing, and retained
earnings are stronger related with future stock market returns. He also found that high
aggregate asset growth is associated with lower earnings announcement returns, and greater
earnings disappointments.
Watanabe et al., (2013) tested the relation between asset growth and stock returns in 53
countries in Africa, Asia, Australia, Europe, and America. They found that higher asset
growth rate leads to lower stock returns in the different equity markets. They also found that
there are large variations in the impact of asset growth. The negative relation is stronger in the
developed markets and markets with efficient priced stocks.
They also concluded that the country characteristics such as limits to arbitrage, investor
protection, and accounting quality do not affect the relation of asset growth and stock returns.
Wang et al., (2015) examined the relation between asset growth and cross-section of Chinese
stock return. Data used to discuss if there is investment effect, which factors lead to it; risk
factors or behavioral factors using two approaches (portfolio analysis, and cross-section
analysis).
They showed that investment affects significantly the Chinese stock market. They found that
the firm with higher investment has lower cross-section stock returns. They found that the
behavioral finance theory is better in explaining the investment effect on stock return than
risk-based theory.
On the behavioral basis, when the investors have restricted attention and cognitive processing
power, face limited, complex information and complex environment; they cannot make a
decision and show herd behavior which leads to systematic asset mispricing. Investor
overreaction to positive information leads to over investment, which leads to lower return.
They concluded that the relation between investment and subsequent stock returns is negative.
According to risk- adjusted theory, CAPM cannot fully clarify the investment effect. The
multivariate regression shows that the coefficient for return on equity, book-to-market ratio,
and beta of CAPM are insignificant. It agrees the idea that the investment effect results from
mispricing and is inconsistent with the prediction of the risk-based explanation.

The relation between sales growth and stock return

Lau et al., (2002) examined the relation between stock returns and five economic variables,
from them sales growth (SG). They have used data from Singapore and Malaysia. They
calculated SG for each firm by taking the weighted average SG for the past 3 years. They
found a negative relation between weighted average annual sales growth and stock return in
Singapore and not appeared in Malaysia.
Muneesh et al., (2004), using market-based and nonmarket-based measures of firm size, they
determined the firm characteristics that explain variations in common stock returns when
market factors controlled.
They examined if there is a real relation between size and stock returns by using market and
nonmarket-based measures of company size. They also examined the strength of value effect
which named as distressed firm effect.
They found strong size impact and weak value impact in stock returns. They explained size
effect as relation between size and common stock return. They also explained measures of
firm size used in the research from them total assets (TA). TA is defined as “book value of
total assets”, and it reflects the asset base needed to support operation of business. And from
value or distressed measures past sales growth (PSG) which is compounded growth rate of net
sales for 3 years prior to portfolio formation. They found strong size impact and weak
distressed firm impact in stock returns in Indian stock market.

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Hermelo et al., (2007) explained that it is important to design highly effective and efficient
firm growth improvement programs, to make sure that public and private resources are not
wasted. They said that the larger the firm would become, the smaller the growth rate would be
until it got to a point at which the large firm could not increase its size any more.
Higher profit helps firm to invest more and expand. They used profit in terms of return on
sales in the two years previous the period analyzed. They found that firms with high return
have larger financial funds available from retained earnings in addition to external financing
to fund new projects, enter new markets, invest in new technology, and then achieve higher
growth rates.
Tahir et al., (2013) explained that sales and income growth can be anticipated to affect rate
of return and market value measures in both actual and simulated industries. They showed
asset growth as proxy for plant expenditures, equipment expenditures, and research intensity,
and said that it affects sales and income growth, so indirectly affect profitability and market
value.
They found that market capitalization, book-to-market value, and earnings per share have
positive significance impact of stock return, while sales growth has insignificant positive
impact. They concluded that the insignificant impact of sales growth might be due to very
weakness of efficiency in Pakistan stock market.
Menike et al., (2015) in a comparative analysis of Sri Lanka and United Kingdom stock
markets, they explained that the movements in the stock prices are affected by changes in
fundamentals of the firm and economy and the expectations about future prospects of these
fundamentals. So, the country’s economy performance depends on how well the stock market
performs. They studied the determinants of stock returns in Sri Lankan and United Kingdom.
They tested the expected stock return as dependent variable with firm sales growth rate. They
concluded that, In Sri Lanka, the past sales growth rate makes a positive significant influence
on subsequent stock returns. In United Kingdom, the past sales growth rate does not
significantly influence on subsequent stock returns at all.

Sales-weighted fixed assets growth

According to Eldomiaty (2010), there are many factors affect firm growth that leads to
appearing two theories to explain these factors which are growth-learning theory and growth-
size theory. Growth-size theory focuses on the relation between firm growth and its size.
Growth-learning theory focuses on the behavior of cost function as a result of firm learning.
Each firm has a U shape cost function, and it is supposed that each firm produces at lower
point of the curve (Viner 1932). For example, innovation helps the firm to grow which need
extra cost, so the firm growth can be explained by the cost function.
Eldomiaty has explained that both growth-size and growth learning theories may complete
each other. For example, when the firm needs to increase its sales, it will lead to increasing
cost.
The approach of the research is to use sales ratios in examining growth size relation, and use
cost ratios to examine growth learning relation. Then it uses both ratios together to find its
relation with firm growth. It examined contribution of ratios to low and high-growth firms.
He introduced a measure of firm growth relies on sales-weighted fixed assets growth. It is
characterized by taking into account sales and fixed assets growth at the same time and it
related fixed assets growth to firm’s maximum sales.

The relation between fixed assets growth and stock returns

Berk et al., (1999) explained that firms tend to invest more when its stock prices and cash
flows increase, but stock price responds to capital investment announcement. Financing

7
choices (equity issuance) that are used in the investment leads to negative stock returns.
While when the firm decreases investment such as repurchases, it leads to positive returns.
Increasing investment expenditures need high financing means that the capital market is
confident in the firm and its management. High investment expenditures mean that the firm
has great investment opportunities.
Lamont (2000) showed that the relation between investment and stock returns should be
positively overtime and it happens when discount rate decreases and both firm investment and
stock price increase. Also the relation between investment and future stock returns should be
negatively overtime and it happens when discount rate is low, present investment is high and
future expected return is low.
He concluded that the negative co-variation relation between investment and stock returns
may be the result of investment lags decision to invest and investment expenditures. This lag
prevents the firm from adjusting investment directly when discount rate changes and also can
leads to negative correlation between actual investment and current returns.
He concluded that planned investment positively related with current return and negatively
related with future return. With investment lags, expected future investment responds to
change in investing desire. Expected aggregate investment has a negative relation with
expected returns. It means that planned investment responds to discount rate changes which
are the result of change in equity risk premium. He also concluded that the increase of
discount rate leads to decrease in investment.
Titman et al., (2004) explained that firms tend to invest more when stock prices increases,
then cash flows are the best predictor of firm investment expenditures. Also, stock prices react
favorably to main capital investment announcement.
They showed that when the firm increases its capital investment, it achieves negative
benchmark adjusted return. And this negative relation is strong in firms with greater
investment discretion. Investors tend to underreact to firms with increased investment
expenditures. However firms that make capital investment tend to have high past return and
issue equity. Increasing in stock price makes it easy to increase investment expenditures. It
has been found that the firm that increases its investment expenditures the most tends to
underperform its benchmark over the following five years.
It is found that the negative relation between capital investment and return is stronger for
firms with higher cash flow and\or lower debt ratios, which probably tends to overinvest.
According to Porter (2005), there is a relation between investment growth and equity return
taking into account lag between investment decision and expenditures. He found that
investment returns are highly related with the equity returns of industry portfolio.
Investment planning stage leads to difference between financial investment decisions and
related investment expenditures. He showed that equity return is function of both current
investment decisions and related future expenditures. He also showed that expected
investment return and expected equity return are equal taking into account time-to-plan.
He found that lagged equity returns are related with investment growth. He showed that the
firm can put resources through time through making small deviations from investment plan
which leads to increase firm equity.
He also explained that investment return and equity return lagged by the time-to-plan are
equal and can be predicted by the same variables. He found that lagged differences in
investment and equity returns can anticipate future equity and investment returns.
Li et al., (2006) examined the significance of information contained in sector investment
growth rates for interpreting the cross-section of equity returns. They explained that the
different sectors in the economy may face different productivity shocks that will lead to
different returns on capital for those sectors’ firms.

8
They showed that return on capital and equity returns are directly related, determines
investment, and as result, the investment growth of the sector. They focused on the correlation
between investment growth rate in the economy’ broad sectors and their implications for the
cross section of equity returns. They found that the asset pricing tests show that the
considered investment growth rates are important in interpreting the cross-section of equity
returns.
Christopher et al., (2006) made an empirical investigation of recent theoretical models
implication that relate expected returns to firm investment and related changes in valuation.
They documented empirical relations among market values, firm level investment, and book-
to-market ratios. They found that stocks classification to valuation portfolios by Fama-French
methodologies depend on previous growth rates in firm specific capital expenditures.
They explained that there is a relation between stock returns and firm-level investment. They
formed portfolios based on investment growth rates and found that subsequent monthly
returns are significantly lower for firms that accelerated investment recently.
They found that firm-specific growth incorporate investment assists explaining monthly stock
returns in the cross-section in a pattern similar to book-to-market. Briefly, they found an
empirical relation between past firm-specific investment activity and valuation ratios. Firm-
specific capital investment seems to be condition for valuation ratios and expected stock
returns.
Christopher et al., (2009) estimated cross-sectional regression of future monthly stock return
on current investment. They found that there is a negative relation between abnormal
investment and stock return on average. They found that since the abnormal investment
premium is relatively high, overinvesting firms have particularly high growth in subsequent
abnormal investment and low subsequent abnormal returns.
They showed that if the firm’s stock is mispriced, managers can issue overvalued stock or
buyback overvalued equity. If stock price is higher than fundamentals, managers of equity-
dependent firm can issue equity and vice versa.
Suresh et al., (2014) examined the impact of asset growth on stock returns in Pakistan Stock
Market. They used group of independent variables, from them, fixed assets. They tested
whether the association of asset mechanisms can be related to firm stock returns.
By testing the relation between the firm’s fixed assets and stock returns, they found that there
is no relation between the two variables. They concluded that there is a meaningful relation
between the rate of stock return and the total asset.
Menike et al., (2015), in a comparative analysis of Sri Lanka and United Kingdom stock
markets. They studied the determinants of stock returns in Sri Lankan and United Kingdom.
They tested the expected stock return as dependent variable with firm explanatory variable-
the fixed asset growth rate.
They concluded that, In Sri Lanka, There is no apparent relation between fixed asset growth
and stock returns. In United Kingdom, Fixed assets growth rate has a significant negative
relation with stock returns.

The Need for Further Research:

There is a lack in studies that applied on Egyptian stock exchange to prove the impact of firm
growth on stock returns. Therefore, taking into account previous literatures, the goal of this
research is to fill the gap in the literature by starting with the exploration of these variables
and illustrate how they affect the stock returns of each firm in the research sample.

Previous literatures suggest that firm growth is an area of interest for researchers, policy
makers, and practitioners. Growth affects many items inside and outside the firm, help the

9
firm to survive and affect employment rate and demand on other sectors products and
innovation, so the firm needs to know if growth is necessary for it or not and if it affects its
value and return.
To sum up, this research is going to answer an important question which is:
Does growth in firms listed on Egyptian Stock Exchange affect their Stock Returns?

Research Hypotheses:
Relevant studies in the literature help in developing the hypotheses that follow:-
H1: There is a positive impact of total assets growth on stock returns.
H2: There is a positive impact of fixed assets growth on stock returns.
H3: There is a positive impact of Sales revenue growth on stock returns.
H4: There is a positive impact of Sales-weighted fixed assets growth on stock returns.

Research model:
The variables included in the proposed model demonstrated in Figure (1) are:
1. The independent variables are: a) Total assets growth rate b) Fixed asset growth rate c) Sales
revenue growth rate d) Sales-weighted fixed assets growth rate.
2. The dependent variable is stock returns.

firm growth
total assets growth fixed assets growth sales revenue sales-weighted fixed
rate rate growth rate assets growth rate

stock returns

Figure (1): Research model.

Research Methodology:
This research is designed to study the impact of firm growth on stock returns using existing
literature review and analyzing some items in the financial statements of nonfinancial firms
listed on Egyptian Stock Exchange. The standard statistical tests are utilized in order to test
the hypotheses.
The data frequency is annual. The type of data is cross-sectional that covers the period from
2010-2014.Secondary data are obtained from financial statements of firms listed on Egyptian
stock exchange.
Population is the nonfinancial firms listed on Egyptian stock exchange. The nonfinancial
firms are classified into 15 sectors with 178 firms.

11
Population is divided into sectors (strata) based on the nature of the business, so stratified
random sampling is the most suitable approach for the study.
According to Sekaran 2003, when the population is 178 firm which approximately 180, the
appropriate sample size is 122 firm.
The final sample is comprised of 77 nonfinancial listed firms in the Egyptian Exchange
during a five year sample period (2010-2014).
Firms with non-December 31 fiscal year-end are excluded to facilitate interpretation of results
in the context of the economics of the period. Firms with insufficient data to calculate any of
the independent variables are excluded. Finally, sample excludes firms trading in foreign
currency to unify the currency.
All variables were calculated, and then the following statistical techniques were used in the
research:
1- First, descriptive statistics were used to describe the sample characteristics (mean and
standard deviation).
2- Second: Test of stationary and cointegration of time-series of study variables (dependent
and independent) have used.
3- Third, Panel estimation model was used to determine the most significant independent variable
to impact on the level of stock return.
4- Finally, Pairwise Granger Causality Tests was used to determine which independent
variable(s) cause stock returns.

Results of Hypothesis testing:

Panel estimation was used to show whether there is a significant relation between dependent and
independent variables. Pairwise Granger Causality Test was used to determine which independent
variable(s) cause stock returns (See table 1 and table 2 in Appendix). The following part
represents the results of hypotheses.

Test the First Research Hypothesis:

H1: There is a positive impact of total asset growth on stock returns.
The dependent variable is R and the independent variable is TAG.
Statistical techniques: T-test is used to show whether there is a significant impact of total
asset growth on stock returns
This hypothesis proved that stock return of firms listed on Egyptian stock Exchange is not
affected by their total asset growth.
Test the second Research Hypothesis:
H2: There is a positive impact of fixed asset growth on stock returns.
The dependent variable is R and the independent variable is FAG.
Statistical techniques: T-test is used to show whether there is a significant impact of fixed
asset growth on stock returns
This hypothesis proved that stock return of firms listed on Egyptian stock Exchange is
negatively affected by their fixed asset growth.

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Test the third Research Hypothesis:

H3: There is a positive impact of sales revenue growth on stock returns.

The dependent variable is R and the independent variable is SRG.
Statistical techniques: T-test is used to show whether there is a significant impact of sales
revenue growth on stock returns
This hypothesis proved that stock return of firms listed on Egyptian stock Exchange is
positively affected by sales revenue growth.
Test the forth Research Hypothesis:

H4: There is a positive impact of sales-weighted fixed asset growth on stock returns.
The dependent variable is R and the independent variable is SWFAG.
Statistical techniques: T-test is used to show whether there is a significant impact of sales-
weighted fixed asset growth on stock returns
This hypothesis proved that stock return of firms listed on Egyptian stock Exchange is
positively affected by sales-weighted fixed asset growth.
Pairwise Granger Causality Tests
TAG, FAG, SRG, and SWFAG do not cause stock returns.

Empirical Research Findings:

Research aims to examine the impact of firm growth on stock returns, applied on nonfinancial
firms listed on Egyptian Stock Exchange, using Four measures of firm growth ( total asset
growth, fixed asset growth, sales revenue growth, and sales weighted fixed asset growth).

According to the empirical study:-

 The significant value of T-test concluded that total asset growth does not impact on stock
returns. Coefficient of determination (R2) of total asset growth explains (66.94%) of
variation of stock returns and the rest (33.06%) is due to either random error or other
independent variables excluded from regression model. The significant value of F-test of
total asset growth is less than 0.001, so the model can be accepted and results can be
applied.
 The significant value of T-test concluded that fixed asset growth has negative impact on
stock returns. Coefficient of determination (R2) of fixed asset growth explains (67.35%)
of variation of stock returns and the rest (32.65%) is due to either random error or other
independent variables excluded from regression model. The significant value of F-test of
fixed asset growth is less than 0.001, so the model can be accepted and results can be
applied.
 The significant value of T-test concluded that sales revenue growth has positive impact
on stock returns. Coefficient of determination (R2) of sales revenue growth explains
(67.82%) of variation of stock returns and the rest (32.18%) is due to either random error
or other independent variables excluded from regression model. The significant value of
F-test of sales revenue growth is less than 0.001, so the model can be accepted and results
can be applied.

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 The significant value of T-test concluded that sales weighted fixed asset growth has
positive impact on stock returns. Coefficient of determination (R2) of sales weighted
fixed asset growth explains (67.29%) of variation of stock returns and the rest (32.71%)
is due to either random error or other independent variables excluded from regression
model. The significant value of F-test of sales weighted fixed asset growth is less than
0.001, so the model can be accepted and results can be applied.
 Pairwise Granger Causality Test concluded that the significant levels of all hypotheses
are greater than 0.05, so, we reject all null hypotheses. And, Total asset growth does not
cause stock, returns, fixed asset growth does not cause stock returns, sales revenue
growth does not cause stock returns, and sales- weighted fixed asset growth does not
cause stock returns.

Research Implications:
Results of this research provide some important implications for researchers and practitioners.
Theoretical Implications
From a theoretical perspective this research extended the understanding of firm growth and
stock returns in terms of which can let the researchers tackle stock returns as a dependent
variable. Moreover, this research discussed measures of growth in firms listed on EGX. More
specifically, the research examined how firm growth measures can affect firms' stock returns
listed on EGX.
Results indicate that There is no impact of total asset growth on stock returns. And fixed asset
growth impacts negatively on stock returns. Also, both sales revenue growth and Sales
weighted fixed asset growth impacts positively on stock returns.

Practical Implications
The findings of this research also have important implications for practitioners in the field of
finance. The research provides firms' managers with a framework to use the proposed model
for their own development strategies. Stockholders and practitioners should be aware of
variables such as SRG, and SWFAG to improve stocks trend then later affect stock returns
positively.
The research also shed the light on the effect of TAG, and FAG on stock returns. It seems that
it should be aware of their negative impact on stock returns which can lead at the end to
dissatisfaction of stockholders. Each firm should use the most appropriate way to grow
according to its objectives, with taking into account the level of related error of each variable.

Research limitations:
The research suffers from some limitations which are:-

First, data used is limited to the time period 2010 to 2014. Using data over a longer time
period would have led to more accurate results of the study.
Second, study sample excluded the firms with non-December 31 fiscal year-end, and firms
trading in foreign currency.
Third, the research has used only four measures of firm growth (TAG, FAG, SRG, and
SWFAG); so, it is advisable for future research to use other measures of firm growth (such as
book-to-market ratio and earnings-per-share …etc.), and examine their impact on stock
returns.

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Fourth, Future Researches also can determine other variables that impact on the relation
between the firm growth and stock returns.
Fifth, According to the circumstances occurred during the selected period of the study (2010-
2014), the 25th January revolution which may impact on the result of the study, so using other
time-series may lead to more accurate results.

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Websites
http://www.egx.com.eg/
http://www.stat.fi/meta/kas/kayttoomaisuude_en.html
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 Appendix:
Table (1): panel estimation model to determine the most significant of independent variables.

2
No Independent Variables Estimated t test F test R

coefficient value Sig. value Sig. %

1 Total asset growth -0.074046 -0.389074 0.6975 8.641833 0.000000*** 70.757
2 Fixed asset growth -1.428052 -5.106127 0.0000*** 8
3 Sales revenue growth 0.229146 3.048482 0.0025**
4 Sales weighted fixed asset 2.022691 4.990150 0.0000***
growth
5 Constant -0.067440 -8.144864 0.0000***

Akaike info criterion Schwarz criterion Hannan-quinn criterion

-2.024358 -1.151564 -1.678204
***Parameter is significant at the (0.01) level

Table (2): Pairwise Granger Causality Tests.

Null Hypothesis: Obs. F-Statistic Prob.

FAG does not Granger Cause R 231 0.44462 0.6416
TAG does not Granger Cause R 231 1.38281 0.2530
SRG does not Granger Cause R 231 0.21122 0.8098
SWFAG does not Granger Cause R 231 0.69964 0.4978

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