Implied Returns and the Value Premium

26 Pages Posted: 1 Oct 2011 Last revised: 16 Feb 2012

Date Written: September 16, 2011

Abstract

Superior returns of value firms are consistent with rational expectations under costly reversibility and the countercyclical price of risk through examination of expected rates of return (k) and market risk premiums (MRP) over time. With increases in the book-to-market (B/M) ratio, both the expected rate of return (k) and expected market risk premium (MRP) generally increase. This upward trend in k and MRP appear justified as ROE (book) steadily declines with increasing B/M. Consistent with the countercyclical price of risk, k and MRP during contractions are greater than those of non-contractions. Consistent with costly reversibility, growth firms with low B/M and FATA purchase more fixed assets during both contractions and non-contractions than value firms with high B/M and FATA. Inconsistent with costly reversibility, value firms purchase more fixed assets during contractions than non-contractions

Keywords: Investments, Asset Pricing, Value Premium

JEL Classification: G12

Suggested Citation

Goebel, Joseph, Implied Returns and the Value Premium (September 16, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1928900 or http://dx.doi.org/10.2139/ssrn.1928900

Joseph Goebel (Contact Author)

Ball State University ( email )

Muncie, IN 47306-0340
United States

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