48 Pages Posted: 19 Jun 2017
Date Written: June 16, 2017
The conventional wisdom argues that the growth stocks are more risky to earn 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 higher premium. To solve for this tension, this paper proposes a novel but simple transformation of the Book-to-Market ratio, the intensity of Book-to-Market ratio to captures the dynamics of growth options. Our results show the intensity of Book-to-Market ratio has a strong negative relation with future cross–sectional stock returns even after controlling for main return predictors including Book-to-Market ratio. Therefore, consistent with conventional wisdom, our results confirm that growth stocks tend to earn higher expected premium and more risky than value stocks.
Keywords: Intensity of BM, Growth Option, Migration
JEL Classification: G11, G12
Suggested Citation: Suggested Citation
Jia, Yuecheng and Yang, Haoxi, Growth Stocks Are More Risky: New Evidence on Cross–Sectional Stock Returns (June 16, 2017). Available at SSRN: https://ssrn.com/abstract=2988137