A Novel Measure of Conditional Value Premium

57 Pages Posted: 19 Aug 2010 Last revised: 31 Jul 2015

See all articles by Qing Bai

Qing Bai

Dickinson College

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Date Written: July 10, 2015

Abstract

We propose a novel conditional value premium measure based on the present-value relation that market reaction to a firm’s public announcement reveals the firm’s discount rates. Specifically, because most splitting stocks are growth stocks on which, by construction, the value premium has strong influence, the average splitting stock announcement-day returns track closely conditional value premium. We find qualitatively similar results using announcements of divested asset acquisitions in which acquirers are usually growth firms. Consistent with risk-based explanations, our conditional value premium measures correlate positively with future GDP growth and help explain the cross-section of stock returns.

Keywords: Value premium, stock split, present-value relation, and stock return predictability

JEL Classification: G1

Suggested Citation

Bai, Qing and Guo, Hui, A Novel Measure of Conditional Value Premium (July 10, 2015). Available at SSRN: https://ssrn.com/abstract=1661248 or http://dx.doi.org/10.2139/ssrn.1661248

Qing Bai

Dickinson College ( email )

Carlisle, PA 17013
United States

Hui Guo (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
418 Carl H. Lindner Hall
Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

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