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

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.