Assistant Professor Jason Chen's research has yielded an exciting new perspective on the nature of value stocks and growth stocks.
Traditionally, growth stocks (where prices are high relative to fundamental variables) were thought to grow faster than value stocks (where prices are low relative to fundamental variables).
Chen questioned this conventional wisdom.
He undertook an extensive examination of their actual performance. He compared the earnings and cash flows of the two types of stocks and discovered that the term growth stock may be a misnomer; they actually do not grow faster than other stocks.
Moreover, Chen’s research results suggested that earnings of value stocks grew at a rate of approximately 50 per cent from the first year to the second year, whereas growth stocks increased in earnings by about 5 per cent.
“When we think of growth stocks, we typically think of Google," says Chen. "But rose.com was also a growth stock that you most probably have never heard of it because it is not there anymore. Once you account for all the growth stocks that have failed, growth stocks clearly don’t have higher cash-flow growth.”
These results have spawned a new area of research for finance scholars, allowing Chen to begin work on his latest endeavour; an examination of market efficiency. His award winning work in this field is recognized as being innovative and significant in regards to currently accepted market efficiency theories.
Chen, along with two Sauder colleagues, Associate Professors Harjoat S. Bhamra and Lorenzo Garlappi, are looking at how market efficiency impacts the economy, society, and investment. He explains that there are two forms of market inefficiency; aggregate mispricing and cross-sectional mispricing.
The former is self-levelling, while cross-sectional mispricing is not. It appears that overpriced areas in the market tend to attract more money thus affect a more significant impact on the real economy. This shift to overpriced products can deplete financial resources from other sectors of the market. As a result there is a greater impact on the real economy by cross-sectional mispricing.
Based on preliminary results, Chen suggests that public policy related to market efficiencies should attend to the differences between these two pricing models as a means to understand the ebbs and flows of the market.
Visit Professor Chen's profile for more information on his latest research.