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Investment ManagementThe Dimensions of Stock Returns
Strategic Capital believes that because they are riskier, financially less healthy "value" companies have higher costs of capital than financially healthier "growth" companies. When they borrow from a bank, value companies pay higher interest rates; likewise, when they issue stock, they receive lower prices. A company's cost of capital is the investor's expected return. Small value companies therefore have higher expected returns than large growth companies. Long-term increases in expected return can only be achieved by accepting larger exposure to small cap and/or value stocks. Size and price characteristics, along with broad stock market exposure, are the major determinates in equity returns.
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