Growth Stocks

Wai Mun Fong
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Wai Mun Fong: National University of Singapore

Chapter 4 in The Lottery Mindset: Investors, Gambling and the Stock Market, 2014, pp 77-100 from Palgrave Macmillan

Abstract: Abstract Growth stocks systematically underperform value stocks in many markets, especially among small firms that are primarily owned by individual investors. This chapter presents updated evidence on the value premium or book-tomarket effect. I show that the value premium has remained strong since the 1960s, exists globally, is most pronounced among small firms, and is mainly driven by the overpricing of growth stocks that have characteristics very similar to lottery-type stocks. Cognitive biases that lead investors to be over-optimistic towards growth stocks are examined, along with empirical evidence on earnings extrapolations. The role of short-selling constraints and agency issues in fund management which prevents effective arbitrage of the value anomaly will also be discussed.

Keywords: book-to-market; earnings extrapolation; lottery-stock preference; value premium (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-38173-6_4

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DOI: 10.1057/9781137381736_4

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