Value versus growth: Australian evidence


  • The helpful feedback of participants at the 2010 European Financial Management Association annual meetings, the 2010 Paul Woolley Centre workshop at the University of Technology Sydney, the 2009 Australasian Finance and Banking Conference and the second annual symposium on value investing for the Ben Graham Centre for Value Investing held as part of the 2009 Multinational Finance Society conference are gratefully acknowledged. We are particularly grateful to two anonymous referees for many helpful comments. The financial assistance provided by the Department of Accounting and Finance at Monash University (1779361) is gratefully acknowledged. Veeraraghavan is a centre associate of the Australian Centre of Financial Studies. Views expressed in this article are the views of the author and are not the views of ASIC.


The value-growth effect is one of the most pervasive patterns in stock prices. In this study, the ability of four proxies for value-growth, book-to-market, sales-to-price, earnings-to-price and cash-flow-to-price to explain equity returns is analysed. The findings show that in aggregate, book-to-market best explains cross-sectional variation in Australian equity returns, which in isolation suggests that it is the superior proxy for value-growth. The analysis is taken further and the value-growth effect is examined separately in positive and negative earnings firms. After segregating firms, it is found that in the negative earnings sample, book-to-market is the best value-growth proxy and in the positive earnings sample, cash-flow-to-price has the highest level of significance and is thus the superior value-growth proxy. The economic significance of this result is telling, as the firms that report positive earnings are much larger than those that report negative earnings.