Risk and Return of Value Stocks
Posted: 29 Aug 1998
We find that value stocks are riskier because they are usually firms under distress, have high financial leverages, and face substantial uncertainty in future earnings. These risk characteristics are as powerful as size and book-to-market in explaining cross sectional differences in returns in Pacific Rim markets. Value stocks offer reliably higher returns in the U.S., Japan, Hong Kong, and Malaysia, corresponding to the higher risk, but not in the high growth markets of Taiwan and Thailand because the spread of risk between small, high book-to-market stocks and big, low book-to-market stocks is small.
JEL Classification: G12
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