Value Versus Growth: Time-Varying Expected Stock Returns
44 Pages Posted: 23 Sep 2008 Last revised: 16 Sep 2009
Date Written: September 19, 2008
Using the Markov switching framework of Perez-Quiros and Timmermann (2000), we show that the expected value-minus-growth returns display strong countercyclical variations. Under a variety of flexibility proxies such as the ratio of fixed assets to total assets, the frequency of disinvestment, financial leverage, and operating leverage, we show that value firms are less flexible in adjusting to worsening economic conditions than growth firms, and that inflexibility increases the costs of equity in the cross section. The time-variation in the expected value premium highlights the importance of conditioning information in understanding the cross section of average returns.
Keywords: Value stocks, growth stocks, regime switching, time-varying expected returns, real flexibility
JEL Classification: E44, G12, G14
Suggested Citation: Suggested Citation