The Value Premium and Changing Expectations: On the Growth of Value Stocks and the Value of Growth Stocks

23 Pages Posted: 24 Dec 2004

See all articles by Tessa Wouters

Tessa Wouters

University of Groningen - Faculty of Economics and Business

Auke Plantinga

University of Groningen

Date Written: June 2006

Abstract

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

Wouters, Tessa and Plantinga, Auke, The Value Premium and Changing Expectations: On the Growth of Value Stocks and the Value of Growth Stocks (June 2006). Available at SSRN: https://ssrn.com/abstract=908593 or http://dx.doi.org/10.2139/ssrn.908593

Tessa Wouters (Contact Author)

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

Auke Plantinga

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen
Netherlands
+31 50 363 3685 (Phone)

HOME PAGE: http://www.aukeplantinga.com

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