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The Anatomy of Value and Growth Stock Returns

Eugene F. Fama

University of Chicago - Finance

Kenneth R. French

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

August 2007

CRSP Working Paper

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)

Chicago Booth School of Business Logo

Kenneth R. French (Contact Author)
Tuck School of Business at Dartmouth ( email )
Hanover, NH 03755
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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