The Value Premium and Changing Expectations: On the Growth of Value Stocks and the Value of Growth Stocks
23 Pages Posted: 24 Dec 2004
Date Written: June 2006
The nature of the value premium is subject of academic debate for several decades now. It has been suggested that the value premium is associated with investor pessimism. Doukas et al. (2002) have rejected this suggestion, and found that financial analysts are even more optimisms for value stocks than for growth stocks. In this paper, we make an even stronger statement by showing that the value premium is likely to be generated by increased optimism. This conclusion is based on two observations. The first observation is that those stocks that loose their value classification during the evaluation period generate the return on a portfolio of value stocks. The second observation is that analysts become significantly more optimistic about value stocks that loose their classification as a value stock after they have lost their classification as a value stock. If analysts' expectations are representative for investors in general, this suggests that the value premium is driven by an increase in optimism.
Keywords: Asset Pricing, Value premium, underreaction, earnings forecasts
JEL Classification: G12, G14, G11
Suggested Citation: Suggested Citation