Value vs. Growth: Who Leads the Cyclical Stock Market?

Abstract

The market friction theories predict the presence of asymmetric information diffusion between growth and value stocks. This paper provides empirical evidence that growth stocks react to market information faster than value stocks in both up and down market, suggesting that growth stocks are more negatively affected by the worsening market condition, and more favorably affected by the positive market condition. Furthermore, in consistent with the market leadership of growth stocks, the test results show that growth stocks lead value stocks in terms of both mean returns and residual volatilities.