Value Versus Growth: Time-Varying Expected Stock Returns

44 Pages Posted: 23 Sep 2008 Last revised: 16 Sep 2009

See all articles by Huseyin Gulen

Huseyin Gulen

Purdue University - Krannert School of Management

Yuhang Xing

Rice University

Lu Zhang, 张橹

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 19, 2008

Abstract

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

Gulen, Huseyin and Xing, Yuhang and Zhang, Lu, Value Versus Growth: Time-Varying Expected Stock Returns (September 19, 2008). Ross School of Business Paper No. 1115. Available at SSRN: https://ssrn.com/abstract=1270976 or http://dx.doi.org/10.2139/ssrn.1270976

Huseyin Gulen

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Yuhang Xing

Rice University ( email )

6100 South Main Street
Houston, TX 7705-1892
United States

Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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