Clairvoyant Value and the Value Effect

Posted: 4 Sep 2008 Last revised: 30 Dec 2016

See all articles by Robert D. Arnott

Robert D. Arnott

Research Affiliates, LLC

Feifei Li

Research Affiliates, LLC

Katrina F. Sherrerd

Research Affiliates LLC

Date Written: September 3, 2008

Abstract

The authors compare the price of a stock at a given point in time with its ex post realized value, which is defined by the discounted net present value of subsequent actual cash distributions. This measure is called the Clairvoyant Value, that is, the value that a clairvoyant investor with perfect foresight would have placed on the company. Using a stock's Clairvoyant Value, the authors tease out surprising results relating to the extent to which the market has correctly anticipated various future growth rates and to which investors have paid up for future growth expectations. These findings provide additional historical evidence on market efficiency and the value effect in the U.S. stock market. The authors conclude that — although growth stocks (i.e., those trading at high multiples) do historically exhibit superior future growth — the market overpays for superior growth expectations with statistical significance.

Keywords: Clairvoyant Value, Value Effect

JEL Classification: G12, G14

Suggested Citation

Arnott, Robert D. and Li, Feifei and Sherrerd, Katrina F., Clairvoyant Value and the Value Effect (September 3, 2008). Journal of Portfolio Management, Vol. 35, No. 3, 2009. Available at SSRN: https://ssrn.com/abstract=1263127 or http://dx.doi.org/10.2139/ssrn.1263127

Robert D. Arnott (Contact Author)

Research Affiliates, LLC ( email )

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Feifei Li

Research Affiliates, LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8753 (Phone)
949-325-8953 (Fax)

HOME PAGE: http://researchaffiliates.com/index.htm

Katrina F. Sherrerd

Research Affiliates LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8728 (Phone)
949-325-8928 (Fax)

HOME PAGE: http://researchaffiliates.com/index.htm

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