There is a Growth Premium After All

52 Pages Posted: 19 Jun 2017 Last revised: 8 Aug 2018

See all articles by Yuecheng Jia

Yuecheng Jia

Central University of Finance and Economics (CUFE) - Chinese Academy of Finance and Development

Shu Yan

Oklahoma State University - Stillwater - Department of Finance

Haoxi Yang

Nankai University

Date Written: February 6, 2018

Abstract

The conventional wisdom argues that the growth stocks are riskier to earn a higher premium. However, the empirical evidence points out that the value stocks, which are classified based on the book-to-market ratio, tend to have a higher premium. To solve this tension, this paper decomposes the book-to-market ratio into two components, a trend component, and a temporary (innovation) component. Both economic interpretation and empirical results show that the temporary component has a strong negative relationship with future cross-sectional stock returns even after controlling for main return predictors including Book-to-Market ratio, while the trend component is positively associated with the value premium. Therefore, consistent with conventional wisdom, our results confirm that there is growth premium captured by the temporary component of the book-to-market ratio.

Keywords: Book-to-Market ratio, Temporary Component of B/M, Growth Option, Growth Premium

JEL Classification: G12

Suggested Citation

Jia, Yuecheng and Yan, Shu and Yang, Haoxi, There is a Growth Premium After All (February 6, 2018). Available at SSRN: https://ssrn.com/abstract=2988137 or http://dx.doi.org/10.2139/ssrn.2988137

Yuecheng Jia

Central University of Finance and Economics (CUFE) - Chinese Academy of Finance and Development ( email )

39 South College Road
Beijing
China

Shu Yan

Oklahoma State University - Stillwater - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States

Haoxi Yang (Contact Author)

Nankai University ( email )

Tongyan Road 38
Tianjin, Tianjin 300350
China

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