Is There a Value Premium Among Large Stocks?

35 Pages Posted: 29 Jun 2012 Last revised: 23 Apr 2014

See all articles by Sandro C. Andrade

Sandro C. Andrade

University of Miami - Department of Finance

Vidhi Chhaochharia

University of Miami - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: April 2014

Abstract

According to Fama and French's (2012) price-to-book sorts, there is no global value premium among large stocks. Two simple departures from their methodology restore such premium: sorting stocks based on price-to-earnings rather than price-to-book ratios, and using global rather than regional value breakpoints. The resulting global value premium among large stocks, measured as the return spread between top 30% and bottom 30% stocks, increases from 17 (t-stat=1.09) to 64 (t-stat=2.61) basis points per month. Using price-to-earnings computed from earnings estimates rather than historical earnings further sharpens the value effect among large stocks. Not confined to small stocks, the value premium remains a key topic in Finance. Because valuation ratios are not interchangeable, researchers should look beyond price-to-book when studying, or controlling for, the value effect.

Keywords: value premium, global investing, valuation ratios

JEL Classification: G15, G12

Suggested Citation

Andrade, Sandro C. and Chhaochharia, Vidhi, Is There a Value Premium Among Large Stocks? (April 2014). Available at SSRN: https://ssrn.com/abstract=2096310 or http://dx.doi.org/10.2139/ssrn.2096310

Sandro C. Andrade (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

HOME PAGE: http://moya.bus.miami.edu/~sandrade/

Vidhi Chhaochharia

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

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