Abstract

http://ssrn.com/abstract=806664
 
 

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The Anatomy of Value and Growth Stock Returns


Eugene F. Fama


University of Chicago - Finance

Kenneth R. French


Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

August 2007

CRSP Working Paper

Abstract:     
We break average returns on value and growth portfolios into dividends and three sources of capital gain, (i) growth in book equity primarily due to earnings retention, (ii) convergence in price-to-book ratios (P/B) due to mean reversion in profitability and expected returns, and (iii) upward drift in P/B during 1927-2006. The capital gains of value stocks trace mostly to convergence: P/B rises as some value firms become more profitable and move to lower expected return groups. Growth in book equity is trivial to negative for value portfolios, but it is a large positive factor in the capital gains of growth stocks. For growth stocks, convergence is negative: P/B falls because growth stocks do not always remain highly profitable with low expected returns. Relative to convergence, drift is a minor factor in average returns.

Number of Pages in PDF File: 25

JEL Classification: G12

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Date posted: September 28, 2005  

Suggested Citation

Fama, Eugene F. and French, Kenneth R., The Anatomy of Value and Growth Stock Returns (August 2007). CRSP Working Paper. Available at SSRN: http://ssrn.com/abstract=806664 or http://dx.doi.org/10.2139/ssrn.806664

Contact Information

Eugene F. Fama
University of Chicago - Finance ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7282 (Phone)
773-702-9937 (Fax)
Kenneth R. French (Contact Author)
Dartmouth College - Tuck School of Business ( email )
Hanover, NH 03755
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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