Overview

Value effect is the tendency of Value stocks to outperform Growth stocks. Values stocks are the stocks that have low price in relation to their fundamentals and Growth stocks are stocks that have higher price in relation to their fundamentals. It is considered as one of the most prominent and persistent equity anomalies. A huge number of international studies have provided evidence for the pervasiveness of value effect in stock returns (Chan and Lakonishok; Fama and French, etc.). Initially, most of the studies were concentrated in the U.S.; however, gradually researchers started exploring the presence of value effect in other stock markets of the worldwide and documented mixed evidence as to its presence. The findings challenged Efficient Market Hypothesis that suggests that securities are priced rationally to reflect all publicly available information. The extant literature suggests two alternative explanations for the source of abnormal profits made by value stocks. First line of explanation is based on the risk accompanying the value stocks that argues that excess returns to the value investing strategy is a compensation for bearing financial distress risk

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