Clairvoyant Value and the Value Effect

Abstract

The authors compare the price of a stock at a given point in time with its ex post realized value, which is defined by the discounted net present value of subsequent actual cash distributions. This measure is called the Clairvoyant Value, that is, the value that a clairvoyant investor with perfect foresight would have placed on the company. Using a stock's Clairvoyant Value, the authors tease out surprising results relating to the extent to which the market has correctly anticipated various future growth rates and to which investors have paid up for future growth expectations. These findings provide additional historical evidence on market efficiency and the value effect in the U.S. stock market. The authors conclude that—although growth stocks (i.e., those trading at high multiples) do historically exhibit superior future growth—the market overpays for superior growth expectations with statistical significance.