The authors find that value stocks are riskier because they are usually firms under distress, have high financial leverages, and face substantial uncertainty in future earnings. These risk characteristics are as powerful as are size and book-to-market in explaining cross-sectional differences in return in Pacific Rim markets. Value stocks offer reliably higher returns in the United States, Japan, Hong Kong, and Malaysia, corresponding to the higher risk, but not in the high-growth markets of Taiwan and Thailand because the spread of risk between small high-book-to-market stocks and big low-book-to-market stocks is small. Copyright 1998 by University of Chicago Press.