Value versus hyper growth and expected stock returns: In memory of Simon Benninga

• Published date: 01 April 2022
• Author: Roi D. Taussig
• Date: 01 April 2022
• DOI: http://doi.org/10.1002/jcaf.22546

Received: 27 October 2021Accepted: 10 February 2022

DOI: 10.1002/jcaf.22546

RESEARCH ARTICLE

Value versus hyper growth and expected stock returns: In

memory of Simon Benninga

Roi D. Taussig

Department of Economics and Business

Administration, Ariel University, Ariel,

Israel

Correspondence

Roi D. Taussig,Department of Economics

and Business Administration, Ariel

University, Ariel 40700,Israel.

Email: roit@ariel.ac.il

Abstract

This essay expands the theory on value versus growth stocks by adding another

component to growth stocks. The new component is the substantial size growth

(sg) (market capitalization growth). As shown in the financial literature, growth

stock returns are lower than value stock returns. When sg is exploding, the growth

stock returns are even substantially lower.This new variable is highly significant

both statistically and economically.

KEYWORDS

asset pricing, cross-section returns, market capitalization, size, stock return, value vs. growth

JEL CLASSIFICATION

G11, G12, G13, G14, G17

1 INTRODUCTION

The financial literature demonstrates the distinction

between value and growth stocks (Chan & Lakonishok,

2004). Generally, the average return on value stocks is

higher than for growth stocks. This phenomenon was also

found in international markets (Fama & French, 1998).

Value stocks have high Book-to-Market and relatively low

market capitalization (size)growth(sg is size growth here-

inafter). Fama and French (1993) suggest the HML (high

minus low Book-to-Market portfolio returns) as a factor

for the value premium. The value premium is procyclical

(Kirby, 2019). In this study, the value versus growth phe-

nomenon is explored for the cases when firm’s size growth

(sg) is extremely high. Some firms exhibited over the

decades a phenomenal sg. This essay isolates the growth

effect of these special stocks. While growth stocks exhibit

lower returns on average, these hypergrowth stock returns

are exceptionally lower. This effect is measured over the

cross-section of stock returns in the United States.

This essay offers a new source of risk – extreme size

growth (ESG). (Equation (1)).

ExtremeSizeGrowth = ESGit=LnME𝑖,𝑡

ME𝑖,𝑡−1

=Ln

ME𝑖,𝑡−Ln ME𝑖,𝑡−1(1)

where Ln is the natural logarithm, ME is size or market

capitalization.

Section 2presents the literature review, Section 3dis-

cusses the methodology and data, Section 4follows with

the results, and Section 5concludes.

2LITERATURE REVIEW

The Capital Asset Pricing Model (CAPM; Black, 1972;Lint-

ner, 1965; Sharpe, 1964) is the most common model for

explaining asset prices. This model explains the expected

return on an asset by employing the coefficient of system-

atic risk beta and the securities market line (SML). Fama

and French (1992) find that beta is insignificant when

controlling for the market capitalization (size). Therefore,

many model specifications, which include size,donot

J Corp Account Finance. 2022;33:173–177. ©2022 Wiley Periodicals LLC173wileyonlinelibrary.com/journal/jcaf