Growth or Glamour? Fundamentals and Systematic Risk in Stock Returns

Abstract

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