Dynamic Growth Equity Returns

41 Pages Posted: 6 Mar 2011

See all articles by George Blazenko

George Blazenko

Simon Fraser University (SFU) - Finance Area

Yufen Fu

Tunghai University

Date Written: March 3, 2011

Abstract

Within book/market quintiles, expected return from constant growth equity valuation (static growth expected return, SGER) relates positively with realized returns. However, SGER overstates realized returns for growth stocks and understates realized returns for value stocks. We investigate whether reversion in ROE, which is a SGER input, reconciles these biases. We compare several ROE forecasts using both historical and analysts’ earnings estimates but SGER continues to overstate (understate) returns for growth (value) stocks. On the other hand, the regression of return on ROE for value versus growth stocks is a conditional reduced-form version of a dynamic equity valuation model that recognizes the value-premium. We call return forecasts from these regressions dynamic growth expected returns, DGER, which in large part eliminate the value-versus-growth bias.

Keywords: Equity returns, Earnings Reversion, Value Versus Growth

JEL Classification: D92, G12

Suggested Citation

Blazenko, George W. and Fu, Yufen, Dynamic Growth Equity Returns (March 3, 2011). Available at SSRN: https://ssrn.com/abstract=1776194 or http://dx.doi.org/10.2139/ssrn.1776194

George W. Blazenko (Contact Author)

Simon Fraser University (SFU) - Finance Area ( email )

Burnaby, British Columbia V5A 1S6
Canada

Yufen Fu

Tunghai University ( email )

Taichung 407
Taiwan

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