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Keywords:

  • value stock anomaly;
  • real options
  • D81;
  • G12;
  • O33

Abstract

We simulate results from a simple real options model to provide insight into the value-growth stock return anomaly. In our model, firms possess either single (“value” firm) or multiple (“growth” firm) investment opportunities. Our model predicts that growth firms: (1) invest sooner, (2) exhibit greater continuity in capital expenditure over time, (3) have lower book-to-market ratios, and (4) generate lower rates of return than value firms.