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Decomposing value

44 Pages Posted: 13 Jun 2012 Last revised: 24 Dec 2016

Joseph J. Gerakos

Tuck School of Business at Dartmouth College

Juhani T. Linnainmaa

USC Marshall School of Business; National Bureau of Economic Research (NBER)

Date Written: December 23, 2016


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 J. and Linnainmaa, Juhani T., Decomposing value (December 23, 2016). Fama-Miller Working Paper; Chicago Booth Research Paper No. 12-18. Available at SSRN: or

Joseph Gerakos

Tuck School of Business at Dartmouth College ( email )

Hanover, NH 03755
United States

Juhani Linnainmaa (Contact Author)

USC Marshall School of Business ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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