Lucas Nogueira Cabral de Vasconcelos and Orleans Silva Martins
Investors label high (low) book-to-market (B/M) firms as value (growth) companies. The conventional wisdom supports that growth stocks grow faster than the value ones, creating…
Abstract
Purpose
Investors label high (low) book-to-market (B/M) firms as value (growth) companies. The conventional wisdom supports that growth stocks grow faster than the value ones, creating greater shareholder value. The Purpose of this paper is to analyze how stocks of growth and value companies create value for their shareholders in Brazil, compared to the USA market. For this, the authors analyze three dimensions of return.
Design/methodology/approach
First, the authors perform portfolios to analyze the growth rates of shareholders’ return. Then, the authors perform regressions to study the explanatory power of the B/M in growth. The data come from Thomson Reuters Eikon database and the Brazilian Institute of Geography and Statistics. The authors select all non-financial firms with available data from 1997 to 2017.
Findings
The profitability of growth firms is higher than the value ones, in almost every year after the portfolios’ formation, with little variation. Contrary to the findings for the US market, growth companies in Brazil show higher dividend growth than value companies.
Research limitations/implications
It is possible that the database does not contain complete and entirely reliable accounting data, which may partially affect the results.
Practical implications
The findings contradict those exposed in the USA. The implications are the inverse of the US study: the duration-based explanation could be a vital factor for the value premium in the Brazilian stock market. Also, the findings support the standard valuation techniques and help the growth rates estimation in the valuation process (top-down approach).
Originality/value
This study is the first to compare the profitability and dividend growth of growth/value stocks in the Brazilian market. Overall, growth stocks have considerable profitability, and dividend growth compared to value stocks.