Decomposing value

Fama-Miller Working Paper

Chicago Booth Research Paper No. 12-18

Review of Financial Studies 31, no. 5 (2018): 1825-1854.

44 Pages Posted: 13 Jun 2012 Last revised: 22 Mar 2021

See all articles by Joseph Gerakos

Joseph Gerakos

Tuck School of Business at Dartmouth College

Juhani T. Linnainmaa

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER); Kepos Capital

Date Written: December 23, 2016

Abstract

Only those high B/M firms that have decreased in size earn the value premium. These firms follow conservative investment policies, while those high B/M firms that do not earn the value premium generate low cash flows. This difference explains why HML is redundant in some asset pricing models include profitability and investment factors, but not others. Profitability and investment factors subsume HML's ability to predict economic growth, implying that expected growth is high when profitable firms that invest conservatively earn high returns. Our result on the relation between the value premium and changes in firm size provides a testable restriction for theories of value: if a value premium within the model remains when controlling for changes in firm size, such a model is inconsistent with the data.

Keywords: Value premium, risk and mispricing, factor models, firm characteristics

Suggested Citation

Gerakos, Joseph and Linnainmaa, Juhani T., Decomposing value (December 23, 2016). Fama-Miller Working Paper, Chicago Booth Research Paper No. 12-18, Review of Financial Studies 31, no. 5 (2018): 1825-1854., Available at SSRN: https://ssrn.com/abstract=2083166 or http://dx.doi.org/10.2139/ssrn.2083166

Joseph Gerakos

Tuck School of Business at Dartmouth College ( email )

Hanover, NH 03755
United States

Juhani T. Linnainmaa (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

HOME PAGE: http://www.tuck.dartmouth.edu/faculty/faculty-directory/juhani-linnainmaa

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kepos Capital ( email )

620 Eighth Avenue
New York, NY 10018
United States

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