Value and growth stock returns: international evidence (JES)

• DOI: https://doi.org/10.1108/IJAIM-05-2021-0097
• Published date: 07 October 2021
• Date: 07 October 2021
• Pages: 698-733
• Subject Matter: Accounting & finance,Accounting/accountancy,Accounting methods/systems
• Author: Maria Elisabete Neves,Mário Abreu Pinto,Carla Manuela de Assunção Fernandes,Elisabete Fátima Simões Vieira

Value and growth stock returns:

international evidence (JES)

Maria Elisabete Neves

Coimbra Business School, Research Centre, ISCAC, Polytechnic of Coimbra (IPC),

Coimbra, Portugal and University of Tr

as-os-Montes and Alto Douro|CETRAD,

Vila Real, Portugal

M

ario Abreu Pinto

Coimbra Business School, ISCAC, Polytechnic Institute of Coimbra,

Coimbra, Portugal

Carla Manuela de Assunção Fernandes

Universidade de Aveiro –ISCA, Aveiro, Portugal, and

Elisabete F

atima Simões Vieira

GOVCOPP Unit. Research, Universidade de Aveiro, Aveiro, Portugal

Abstract

Purpose –This study aims to analyze the returns obtainedfrom companies with strong growth potential

(growthstocks) and the returns from companieswith quite low stock prices,but with high value (value stocks).

Design/methodology/approach –The samplecomprises monthly data, from January 2002 to December

2016, from sevencountries, Germany, France, Switzerland,the UK, Portugal, the USA and Japan. The authors

have used linear regression modelsfor three different periods, the pre-crisis, subprime crisis andpost-crisis

period.

Findings –The results point out that the performance of value and growth stocks differs from different

periods surrounding the globalfinancial crisis. In fact, for six countries, value stocks outperformed growth stocks

in the period that precedes the subprime crisis and during the crisis, this tendency remained only for France,

Portugal and Japan. This trend changed in the period following the crisis. The results also show that investor

sentiment has a robust significance in value and growth stock returns, mostly in the period before the crisis,

highlighting that the investorsentiment is more significant in the moments that the value stocks outperformed.

Originality/value –As far as the authors know, this is the first work that,taking into account the future

research lines of Capaul et al. (1993), investigates whether the results obtained by those authors remain

current, meeting the authors’challengeand covering the gap of recent studies on the performance of value

and growth stocks.Besides, the authors have introduced a new country,heavily punished by both the global

financial crisis and the sovereign debt crisis to understand whether there are significant differences in

investmentstyles and whether this is related to the different economies. Also, in this context,the authors were

pioneersin adding investorsentiment as an exogenous variable in the influence of stock returns.

Keywords Investor sentiment, Global financial crisis, Growth stocks, Value stocks,

Value-growth spread

Paper type Research paper

JEL classification –G11, G15, G41, C32

This work is supported by national funds, through the Fundação para a Ciência e Tecnologia (FCT) –

Portuguese Foundation for Science and Technology under the project UIDB/04011/2020 and national

funds, through the FCT –Portuguese Foundation for Science and Technology under the project UID/

SOC/04011/2013.

IJAIM

29,5

698

Received12 May 2021

Revised13 July 2021

Accepted5 August 2021

InternationalJournal of

Accounting& Information

Management

Vol.29 No. 5, 2021

pp. 698-733

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-05-2021-0097

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

1. Introduction

As the efficient market hypothesis by Fama (1970) that financial literacy has been

contesting this view (Chan and Lakonishok,2004;Athanassakos, 2009). In general, investors

apply various techniques and strategies to achieve higher levels of returns (Chan and

Lakonishok, 2004). Despite the persistent update of trends in the financialmarket, there are

certain investment styles that, even over decades, do not lose their significance, such as

value and growth stocks investment. These categories of stocks, according to high returns

found in recent years, can counterbalance, at certain times, financial market efficiency

(Capaul et al.,1993;Basu, 1997;Bauman and Miller, 1994;Bartov and Kim, 2004;Graham

and Zweig, 2006;Brooks and Nojin,2010).

Graham and Dodd (1934) pioneered making a distinction between value and growth

stocks. However, the effective recognition of the concept of growth stocks can be attributed

to Price Jr[1]. (Babson, 1951). Thus, value stocksrepresent the stocks of companies that are

trading at lower prices compared to certain economic and financial ratios (e.g. earnings per

share, cash flow to price or priceto book value). In turn, growth stocks represent companies’

stocks that are trading at higher prices comparedto certain economic and financial ratios of

the company (Fama and French,1993,1998;Lakonishok et al., 1994).

According to Bauman and Miller (1997), valuestocks are the stocks of companies that, in

a previous period, presented a low performance and that, in the future, are expected to

perform above the average. In contrast, authorsdefine growth stocks as those that are high

performing and which can achieveand maintain above-average performance in the future.

This topic has been widely developedsince the 1990s and received special attention from

investors, managers and academics.For example, some studies have been carried out in the

sense of trying to perceive the risk and profitability binomial in these values and growth

stocks (Fama and French,1993, 1998;Lakonishok et al., 1994;Black and McMillan,2004,

2006). Value and growth stocks have played a leading role in defining strategies that may

influence future decisions by investors (Bourguignon and De Jong, 2003;Bird and

Casavechia, 2007).

Based on the literature, we considerthat the preference of investors for these two types of

stocks is divided. However, the recent financial literature shows a clear tendency for the

value stocks because they perform better than growth stocks, both in developed and

developing countries and this happens fundamentally when considering a long sample,

covering a large number of years (Capaul, etal.,1993;Basu, 1997;Bauman and Miller,1997;

Fama and French, 1998;Gulen et al., 2011;Chongsoo et al., 2017). However, in the short-term

studies, there are certain sub-periods in which growth stocks performed better than value

stocks (Cronqvist et al.,2015). We can also add that value stocks represent,in general, larger

companies, with a greater market position and perhaps with higher rates of disclosure of

business risks, which canlead to better performance (Nahar et al.,2016).

In this line of reasoning, when the value-growth spread is exceedingly greater than the

market return, this may wantto imply that a financial crisis may be about to happen. Fama

and French (2007). We found that, in times of crisis, that is, when the market is in a

downward trend, value stocks tend to have higher returns (Lakonishok et al., 1994). This

suggests that, in the grayest periods of the financialmarket, when returns are experiencing

huge declines, valuestocks tend to be the exception.

In general, value investorsdo not like to pay more for future growth that may not come to

fruition. They prefer to invest in solidcompanies that are momentarily trading below their

fair value, either for macro reasons or for industry reasons. Thus, as they invest in more

consolidated companies,these investors take less risk in their investments.

Value and

growth stock

returns

699

On the other hand, investingin growth stocks carries a considerable amount of risk. That

is why, in principle, before investing in growth stocks, investors should know their risk

profile, to understandthe degree of risk they are willing to take.

Thus, based on previous research, and also the current gap concerning recent studies on

the performance of value and growth stocks in the financial literature, this work aims to

investigate the performance of value and growthstocks in the markets considered the most

economically significant, suchas Germany, France, Switzerland, the UK, Portugal, the USA

and Japan. Capaul, et al. (1993) identified in their work as future research lines, the

comparison of their results with those obtained in other very different periods. Taking

advantage of this possibility, we propose to make this comparison, once the periods

considered in our sample are very different. We also introduce in our model a new country,

as well as macroeconomic variables and an investor sentiment indicator. Portugal was

added to the sample to act as a “test”to verify/control the hypothesis studied, as it is

considered a small market, withpoor liquidity and with weak legal protection for investors.

The inclusion of this country was made to understand if these market characteristics,

influence the preference of investorsfor stocks of value or growth. In addition, Portugal is a

relatively unexploredmarket throughout the literature and a countrythat suffered a lot with

the subprime crisis and then with the sovereign debt crisis with the Troika’s intervention,

between 2011 and 2014. We should not ignore that Portugal was one of the so-called

Portugal; Ireland; Italy; Greece and Spain (PIIGS) (see, Garcia and Oliveira, 2018 who have

studied value versusgrowth in PIIGS stock markets).

Meanwhile, to understand how those markets are integrated as a whole (Capaul et al.,

1993), two indexes were calculated: the European index, comprising Germany, France,

Switzerland, UK, and Portugal and the Global index, including the European countries

mentioned, the USA and Japan.

After this, it is shown that the performance of these stocks may differ depending on

different periods surroundingthe global financial crisis Thus, the period before, during and

after the 2008 subprime crisis was considered (also Xu and Ji, 2016,distinguish between the

period before and after 2008, when the globalfinancial crisis started).

Besides, with a linear regression model, we investigated which macro variables [yield

ratio dividend, the structure of interest rates (termspread), the inflation rate, rate of change

of the index of industrial production and short-term interestrate] can predict the returns of

value and growth stocks. The model alsoincludes a variable that seeks to capture the effect

of investor sentiment (considered as a proxy the consumer confidence index [CCI]) on the

returns of value and growth stocks.

This study contributes to the existing literature in several ways. Covering a gap in the

recent empirical research, we analyzewhether the trend in the financial literature that value

stocks outperform growth stocks is still a reality, considering a relatively recent period.

Second, we explore the performance of value and growth stocks in economic periods that

circumscribe the global financial crisis,including the period immediately before, during and

after the crisis, whichis clearly in need of research in this domain.

Third, we studied whether the macroeconomic environment and investor sentiment, an

original variable concerning the reference to Capaul et al. (1993), have an impact on the

returns of value stocks and growth stocks. Finally, we consider a new country, Portugal,

which serves to control the assumptionsraised, to ascertain whether the characteristics of a

low liquid market, with weak legalprotection for investors and subject to scrutiny by other

markets as it is largely affected by crises, financial and sovereign debt, have an impact on

investors’preferences for stocks of value or stocks and growth. To achieve these aims, we

have used data from January2002 to December 2016.

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