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Value-Growth Investment Strategy: Evidence Based on the Residual Income Valuation Model

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Author(s): Walid Saleh

Journal: International Journal of Economics and Finance
ISSN 1916-971X

Volume: 3;
Issue: 4;
Date: 2011;
Original page

ABSTRACT
This paper explores whether a “value” investing strategy based upon different specifications of the residual income valuation model is riskier than a "growth" investing strategy. The paper motivates such an investigation by noting that, consistent with previous empirical work, the Ohlson (1995) model undervalues (overvalues) low (high) book-to-market stocks, whilst the Feltham-Ohlson model undervalues equities relative to stock market and that the valuation error is so high for low book-to-market stocks. However, the empirical research shows that the Choi et al. (2003) approach yields to overvaluation (undervaluation) problem for low (high) book-to-market stocks. The paper finds and concludes that the "rational school" proposed to explain the value effect is not satisfactory empirically.
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