Nonfundamentals and value returns

Abstract

The study examines additions to and deletions from the Russell Value Index and the Russell 2000 Growth Index. The study documents stronger comovement in value reconstitutions relative to growth reconstitutions. This result is consistent with the hypothesis that nonfundamental comovement is related to the common factor in value stock returns. The mechanism of causality is difficult to determine, however; trade demand, firm characteristics and information diffusion are presented as potential sources that could explain why comovement of small to mid-cap value stocks is greater than the comovement of small to mid-cap growth stocks.