Growth or Glamour? Fundamentals and Systematic Risk in Stock Returns

By John Y. Campbell, Christopher Polk, Tuomo Vuolteenaho. 2005

401 citations recorded by the source corpus.

The cash flows of growth stocks are particularly sensitive to temporary movements in aggregate stock prices (driven by movements in the equity risk premium), while the cash flows of value stocks are particularly sensitive to permanent movements in aggregate stock prices (driven by market-wide shocks to cash flows.) Thus the high betas of growth stocks with the market's discount-rate shocks, and of value stocks with the market's cash-flow shocks, are determined by the cash-flow fundamentals of growth and value companies. Growth stocks are not merely "glamour stocks" whose systematic risks are purely driven by investor sentiment. More generally, accounting measures of firm-level risk have predictive power for firms' betas with market-wide cash flows, and this predictive power arises from the behavior of firms' cash flows. The systematic risks of stocks with similar accounting characteristics are primarily driven by the systematic risks of their fundamentals.

Subfields: Accounting, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/b49b85328bf041f15f57a26437d143d5777bd5c9

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

In Finance

In Strategy and Management

Citations in the corpus

The term structures of equity and interest rates (2011, neutral): “Several studies link observed returns on value and growth stocks to new sources of risk (Campbell and Vuolteenaho, 2004; Campbell, Polk, and Vuolteenaho, 2010; Lustig and van Nieuwerburgh, 2005; Piazzesi, Schneider, and Tuzel, 2007; Santos and Veronesi, 2006; Yogo, 2006).”
Identifying Expectation Errors in Value/Glamour Strategies: A Fundamental Analysis Approach (2012, positive): “…value and growth stocks possess differential sensitivities to time-varying macroeconomic risks (e.g., Vassalou 2003;Petkova and Zhang 2005;Zhang 2005; Lettau and Wachter 2007;Cohen, Polk, and Vuolteenaho 2009; Da and Warachka 2009; Campbell, Polk, and Vuolteenaho 2010;Santos and Veronesi 2010).”
Empirical cross-sectional asset pricing: a survey (2011, neutral): “See Kandel (1984) and Shanken (1986) for maximum likelihood approach to this problem and Campbell et al. (1997) for a more comprehensive treatment.”
An Intertemporal CAPM with Stochastic Volatility (2018, positive): “Campbell and Vuolteenaho (2004) , Campbell et al. (2010) , and Campbell et al. (2013) use this approach to argue that value stocks outperform growth stocks on average because growth stocks hedge long-term investors against declines in the expected return on the aggregate stock market.”
The Baltic Dry Index as a Predictor of Global Stock Returns, Commodity Returns, and Global Economic Activity (2010, neutral): “…a predictor that predominantly captures time-variation in discount rates is likely to display predictive ability for Treasury bond returns, as their cash flows are fixed (see Chen and Zhao (2009), but also Campbell, Polk, and Vuolteenaho (2010) for the possible effect of bond index construction).”
Investor sentiment aligned: : A powerful predictor of stock returns (2015, neutral): “…DG jt+1 is annual log dividend growth rate for one of the characteristic portfolios examined 11Campbell and Ammer (1993), Chen and Zhao (2009), and Campbell, Polk, and Vuolteenaho (2010) argue that since the nominal cash flows of Government bonds are fixed, any Government bond return…”
Who Are the Value and Growth Investors (2017, positive): “Furthermore, the value loadings of individual stocks are primarily driven by their own cash flows, which confirms that the value premium is rooted in fundamentals (Campbell, Polk, and Vuolteenaho 2010).”