The Interest Rate Sensitivity of Value and Growth Stocks - Evidence from Listed Real Estate

This paper analyzes the return sensitivity of value and growth stocks to changes of five interest rate proxies. The analysis is based on monthly data over the 2000 to 2014 period for a global sample of 487 listed real estate companies in 24 countries. This rich setting offers substantial heterogeneity in interest rates across time and countries. We find that value stocks are more sensitive to changes in the short-term rate than growth stocks. This is consistent with the theory that investors with a short investment horizon trade-off the high initial yield of value stocks against a lower risk short-term rate. In contrast, growth stocks are more sensitive to changes in the long-term rate, which is consistent with the future cash flows of growth stocks being discounted at a higher rate. We also find that value stocks are more sensitive to changes in the credit yield. Since credit costs have a direct impact on a firm’s cost of capital, this result is consistent with risk-based theories of the value premium, which argue that value stocks are riskier, because they tend to have higher leverage and a larger default probability.