Value Versus Growth in Dynamic Equity Investing

We develop an expected return measure from a dynamic equity valuation model. We entitle the portion of this measure that is easy to calculate with readily available financial market measures and does not require statistical estimation as static growth expected return (SGER). We use analysts ‟ earnings forecasts as an SGER input to rank firms for portfolio inclusion. We find that portfolios of low SGER firms have negative excess returns − negative alphas − in a four factor conditional asset pricing model. The estimated alpha difference between high and low SGER portfolios is as great as 0.88 % per month. Without generating abnormal returns for investors, we find that analysts make favorable stock recommendations and most optimistically forecast earnings for high SGER firms. Consistent with the dynamic model, returns increase with profitability to a greater extent for value compared to growth firms. We find little statistical or economic significance for earnings volatility beyond SGER for returns. This observation is consistent with SGER as a large portion of expected return from the dynamic model. We conclude that SGER on its own is a useful return measure for common share investing. _____________________________________________________________________________