Value and Growth Stock Behavior During Market Declines
A related paper to:
#26 – Value (Book-to-Market) Anomaly
Authors: Folkinshteyn, Meric, Meric
Title: Value and Growth Stock Price Behavior During Stock Market Declines
Using data for five major stock market declines during the 1987-2008 period, this paper provides evidence that value stocks are generally less sensitive to major stock market declines than growth stocks, controlling for beta, firm size, and industry group. Further analysis using several hundred different significant market move events between 1980 and 2015 confirms the observation that value stocks tend to outperform both the market average and growth stocks during market declines. The implication for investment practitioners is that following a value strategy does not lead one to assume greater sensitivity to unfavorable market conditions.
Notable quotations from the academic research paper:
"We conduct our study using data for five major stock market declines during the 1987-2008 period and several hundred stock market declines during the 1980-2015 period. For our core analysis, we selected a representative sample of five of the largest consecutive days of market decline in the S&P 500 index.
We use a combination of three ratios: dividend to price (dividend yield), market to book, and earnings to price (earnings yield). We classify a stock as a 'growth stock' if it pays no dividends, has an above-median market to book ratio, and a below-median earnings yield. We classify a stock as a 'value stock' if it pays dividends, has a below-median market to book ratio, and an above-median earnings yield.
Our research makes several important contributions to the literature. We document a consistent pattern of lower than average sensitivity of value stocks to most stock market declines, in excess of that predicted by beta. We also document that growth stocks have a greater sensitivity to most major stock market declines. We find that the decline of 2008 was distinct from the other major stock market declines in our study, wherein equities across the value-growth continuum were evenly affected. Further analysis using several hundred different significant market move events between 1980 and 2015 confirms the observation that value stocks tend to outperform both the market average and growth stocks during stock market declines."
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