Where Is the Risk in Value? Evidence from a Market‐to‐Book Decomposition

2019/08/09 by ANDREY GOLUBOV, Andrey Golubov, THEODOSIA KONSTANTINIDI +1 · 1 citation
Economics, Econometrics and Finance · Business, Management and Accounting · #Financial Markets and Investment Strategies #Corporate Finance and Governance #Financial Reporting and Valuation Research

paper · doi:10.1111/jofi.12836

Abstract

ABSTRACT We study the value premium using the multiples‐based market‐to‐book decomposition of Rhodes‐Kropf, Robinson, and Viswanathan (2005). The market‐to‐value component drives all of the value strategy return, while the value‐to‐book component exhibits no return predictability in either portfolio sorts or firm‐level regressions. Existing results linking market‐to‐book to operating leverage, duration, exposure to investment‐specific technology shocks, and analysts’ risk ratings derive from the unpriced value‐to‐book component. In contrast, results on expectation errors, limits to arbitrage, and certain types of cash flow risk and consumption risk exposure are due to the market‐to‐value component. Overall, our evidence casts doubt on several value premium theories.

Citations

• Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency
• Growth Opportunities, Technology Shocks, and Asset Prices
• Corporate Investment and Asset Price Dynamics: Implications for the Cross‐section of Returns
• Market Reactions to Tangible and Intangible Information
• The Value Premium
• Asset Growth and the Cross‐Section of Stock Returns

Cited by

• Risk appetite and (mis)pricing

Related

• The Value Premium
• Market-to-book Ratio in Stochastic Portfolio Theory
• Reports of Value’s Death May Be Greatly Exaggerated
• Contrarian Investment, Extrapolation, and Risk
• Market Reactions to Tangible and Intangible Information