Abstract

http://ssrn.com/abstract=1866397
 
 

References (67)



 


 



An Empirical Assessment of Models of the Value Premium


Huijun Wang


University of Delaware

Jianfeng Yu


University of Minnesota

January 2014

AFA 2013 San Diego Meetings Paper

Abstract:     
Recent models of the value premium typically endogenously link B/M to firm-specific attributes. The value firms earn higher subsequent returns because these firms command a higher risk premium due to a higher default probability, lower profitability, higher operating leverage, shorter cash flow duration, or higher cash flow risk. In this paper, we first sort the entire sample into several groups of firms based on different levels of limits to arbitrage, across which the value premium varies substantially. We find that among the low limits-to-arbitrage groups in which the value premium is relatively small, there is indeed a significant desired relation between B/M and firm-specific attributes. In sharp contrast, among the high limits-to-arbitrage groups in which the value premium is the most pronounced, there is no significant desired relation between B/M and firm-specific attributes. These results are robust to exclusion of small stocks. Our findings suggest that risk may play a role in the value premium only among the low limits-to-arbitrage group, whereas mispricing plays a significant role among the high limits-to-arbitrage group.

Number of Pages in PDF File: 55

Keywords: value premium, mispricing, limits to arbitrage, financial distress, default risk, profitability, duration, cash flow risk, operating leverage

JEL Classification: G12

working papers series


Download This Paper

Date posted: June 19, 2011 ; Last revised: April 8, 2014

Suggested Citation

Wang, Huijun and Yu, Jianfeng, An Empirical Assessment of Models of the Value Premium (January 2014). AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1866397 or http://dx.doi.org/10.2139/ssrn.1866397

Contact Information

Huijun Wang
University of Delaware ( email )
B & E Finance, UD
306 Purnell Hall
NEWARK, DE Delaware 19716
United States
Jianfeng Yu (Contact Author)
University of Minnesota ( email )
321 19th Avenue
Suite 3-122
Minneapolis, MN 55455
United States
HOME PAGE: http://users.cla.umn.edu/~jianfeng/
Feedback to SSRN


Paper statistics
Abstract Views: 1,266
Downloads: 296
Download Rank: 57,605
References:  67

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo3 in 0.468 seconds