RISK AND RETURN OF VALUE STOCKS

We find that value stocks are riskier because they are usually firms u nder distress, have high financial leverages, and face substantial unc ertainty in future earnings. These risk characteristics are as powerfu l as are size and book-to-market in explaining cross-sectional differe nces in return in Pacific Rim markets. Value stocks offer reliably hig her returns in the United States, Japan, Hong Kong, and Malaysia, corr esponding to the higher risk, but not in the high-growth markets of Ta iwan and Thailand because the spread of risk between small high-book-t o-market stocks and big low-book-to-market stocks is small.