Dynamic behavior of value and growth stocks

Abstract

The difference between the performance of growth and value portfolios presents an interesting puzzle for researchers in finance. Most studies showed that value stocks outperform growth stocks. This is the so-called value premium. In this article, we try to find an answer to the question as to why value stocks generate superior returns to growth stocks by dividing growth and value stocks into switching- and fixed-style stocks. We show that the difference in returns between value and growth stocks is caused by frequently rebalancing portfolios and find a value premium for the switching-style stocks and a growth premium for the fixed-style stocks. We will try to find an explanation for this phenomenon using the behavioral finance explanation that investors are unable to process information correctly. We use earnings announcement return data to test whether expectations of investors about future growth are too extreme.