Header

UZH-Logo

Maintenance Infos

Fundamentals of Value versus Growth Investing and an Explanation for the Value Trap


Penman, Stephen; Reggiani, Francesco (2018). Fundamentals of Value versus Growth Investing and an Explanation for the Value Trap. Financial Analysts Journal, 74(4):103-119.

Abstract

Value stocks earn higher returns than growth stocks on average, but a “value” position can turn against the investor. Fundamental analysis can explain this so-called value trap: The investor may be buying earnings growth that is risky. Both the earnings-to-price ratio (E/P) and the book-to-price ratio (B/P) come into play. E/P indicates expected earnings growth, but price in that ratio also discounts for the risk to that growth; B/P indicates that risk. A striking finding emerges: For a given E/P, a high B/P (“value”) indicates higher expected earnings growth—but growth that is risky. This finding contrasts with the standard convention that considers a low B/P to be “growth” with lower risk.

Abstract

Value stocks earn higher returns than growth stocks on average, but a “value” position can turn against the investor. Fundamental analysis can explain this so-called value trap: The investor may be buying earnings growth that is risky. Both the earnings-to-price ratio (E/P) and the book-to-price ratio (B/P) come into play. E/P indicates expected earnings growth, but price in that ratio also discounts for the risk to that growth; B/P indicates that risk. A striking finding emerges: For a given E/P, a high B/P (“value”) indicates higher expected earnings growth—but growth that is risky. This finding contrasts with the standard convention that considers a low B/P to be “growth” with lower risk.

Statistics

Citations

Altmetrics

Downloads

762 downloads since deposited on 22 Aug 2019
755 downloads since 12 months
Detailed statistics

Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Accounting
Social Sciences & Humanities > Finance
Social Sciences & Humanities > Economics and Econometrics
Language:English
Date:12 December 2018
Deposited On:22 Aug 2019 07:49
Last Modified:16 Apr 2020 00:04
Publisher:Taylor Francis
ISSN:0015-198X
OA Status:Green
Publisher DOI:https://doi.org/10.2469/faj.v74.n4.6
Other Identification Number:merlin-id:17050

Download

Green Open Access

Download PDF  'Fundamentals of Value versus Growth Investing and an Explanation for the Value Trap'.
Preview
Language: English
Filetype: PDF
Size: 640kB
Licence: Creative Commons: Attribution 4.0 International (CC BY 4.0)