Where Is the Risk in Value? Evidence From a Market-to-Book Decomposition
132 Pages Posted: 14 Dec 2015 Last revised: 5 Jul 2019
Date Written: July 3, 2019
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.
Keywords: Value Premium, Market-to-Book Decomposition, Risk Exposure, Expectation Errors, Limits to Arbitrage
JEL Classification: G12, G14
Suggested Citation: Suggested Citation