Resumo

Investors label high (low) book-to-market firms as value (growth) firms, and there is conventional wisdom that those stocks grow at different rates. The answer to this question is a contribution to the study of the valuation and firms’ growth dynamics. Also, studies indicate that assets with higher duration are associated with lower returns and show essential explanations for the value effect (Chen, 2017). The empirical evidence about the differences in the duration of their cash flows contributes to the understanding of the duration-value relationship in the Brazilian market.

Because these firms are often at distinct life cycle stages and since the value is a function of future cash flows, there is conventional wisdom that value and growth stocks grow at noticeably different rates. The question is: is this always true? Do Brazilian growth stocks grow faster? To answer this question, we use correlations, portfolio analysis, and regressions to test the difference in net income and dividends growth.

When a firm shows a high book-to-market (B/M), we have a value stock. When the opposite happens, it is classified as a growth stock. In the valuation literature, it is possible to note that the B/M is a negative function of ROE, payout, and growth of dividends, and a positive function of required returns (Damodaran, 2012; Fama & French, 2015). However, the empirical results are conflicted: there is evidence that the growth stocks have higher growth rates (Fama & French, 2006) and evidence that cash flows of value stocks grow faster (Chen, 2017).

We used the Thomson Eikon to get the financial data of each firm, and the Brazilian Institute of Geography and Statistics (IBGE) website to collect the Brazilian inflation index (IPCA). We selected all companies with available data from Dec/1997 to Apr/2017. We dropped financial companies since their B/M disagrees with the rest of the sample. To analyze the growth rates differences of value and growth stocks, we use portfolios analysis. Then, we use quantile regressions to analyze the explanatory power of the B/M in the growth of the studied variables (ROE, changes ROE, and dividends).

Our results can be summarized as follows: the overall mean ROE of growth firms is significantly higher than that reported by value firms in almost every year after the portfolios formation. The annual difference in ROE was not significant in the equally weighted portfolios, showing that the profitability of each firm shows little variation in the years after the portfolios formation. Overall, contrary to the results in the US market exposed by Chen (2017), growth companies show higher dividend growth when compared to value companies in Brazil.

Conventional wisdom holds that, compared to value stocks, the growth stocks, have substantially higher future cash-flow growth rates. Since the findings contradict those exposed by Chen (2017), the implications are the inverse of the US study: the duration-based explanation could be a vital factor for the value premium in the Brazilian stock market. The results also help the growth rates estimation in the valuation process, and based on our findings, we recommend caution in the extrapolation of growth rates for the long term, since growth companies showed a mean reversion.

Chen, H. J. (2017). Do Cash Flows of Growth Stocks Really Grow Faster? The Journal of Finance, 72(5), 2280–2330. Damodaran, A. (2012). Investment Valuation: Tools and techniques for determining the value of any asset. 3th Edition. Fama, E. F., & French, K. R. (2006). Profitability, investment and average returns. Journal of Financial Economics 82(3), 491–518. Fama, E. F., & French, K. R. (2015) A five-factor asset pricing model. Journal of Financial Economics 116(1), 1-22.