Value versus Growth The sources of return differences

The paper empirically investigates the relationship between the value effect and firms’ real activities. Using the three factor model, the risk adjusted value premium is explained only when both investment inflexibility and business cyc le are taken into account. Financial constraint does not directly influence the value ef fect but indirectly through its influence on firms’ investment and disinvestment. Of the two components of the survey based consumer confidence factor, the investor optimism component does not directly drive the value effect. The macro environment prospect component is relevant to the value effect in a similar way that the business cycle factor is.