Download or read book Value Versus Growth in Dynamic Equity Investing written by George Blazenko and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The value-premium is the empirical observation that ldquo;valuerdquo; stocks (low market/book) have higher returns than ldquo;growthrdquo; stocks (high market/book). We propose a new explanation for the value-premium that we call the limits to growth hypothesis. To guide our testing, we use a dynamic equity valuation model that has the property that profitability increases risk for value firms in anticipation of future growth-leverage, whereas, profitability ldquo;coversrdquo; the capital expenditure costs of growth, which decreases risk for growth firms. Because we interpret dividends as a corporate response to growth-limits, we test for this predicted differential relation between profitability and risk for value versus growth stocks with the returns of profitable dividend-paying firms. We find that profitability increases returns to a greater extent for dividend-paying value firms compared to dividend-paying growth firms, which is consistent with a differential relation between profitability and risk. At the same time, we also find that growth firms have lower returns than value firms. We use the limits-to-growth hypothesis to explain why profitability can either increase or decrease risk. High-profitability dividend-paying growth firms have lower returns than low-profitability dividend-paying value firms. This value-premium is consistent with the argument that high profitability ldquo;coversrdquo; the capital expenditure costs of growth, which decreases risk and, thus, returns. At the same time, profitability increases returns to a greater extent for value stocks compared to growth stocks, which is consistent with the hypothesis that profitability increases risk for value firms in anticipation of future growth-leverage.