Value versus Growth Stocks: Book-to-Market, Growth, and Beta

Once growth is controlled for, beta has a significant positive link with book-to-market-value ratios, supporting an important role for beta as share prices are penalized for beta risk. Moreover, growth plays a more significant role in explaining book-market-value ratios than does beta, which suggests that investigations to understand the book-to-market effect on share returns should incorporate measures of future growth prospects. Portfolio return strategies attempting to exploit differences between value and growth stocks show that the book-to-market effect is not easily replicated simply by trading on differences among analysts’ growth estimates. The results of this study suggest that growth and beta are part, but not all, of the book-to-market puzzle.