A Novel Measure of Conditional Value Premium
57 Pages Posted: 19 Aug 2010 Last revised: 31 Jul 2015
Date Written: July 10, 2015
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
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