We study the effect of growth in firms' balance sheets on stock returns by decomposing asset growth into two components, one that captures real investment growth and one that captures accounting distortions and/or reduced efficiency. We show that these components play significant and complementary roles in driving the asset growth anomaly in European equity markets. The effect of the real investment growth (accounting distortions and/or reduced efficiency) component on stock returns, is found stronger in countries with higher (lower) degree of market efficiency, weaker (stronger) barriers to arbitrage, stronger (weaker) corporate governance and less (more) managerial discretion over earnings.