Stock Return Predictability of Residual‐Income‐Based Valuation: Risk or Mispricing?

23 Pages Posted: 4 Jun 2013

See all articles by Lee-Seok Hwang

Lee-Seok Hwang

Seoul National University - College of Business Administration

Woo-Jong Lee

Seoul National University

Date Written: June 2013

Abstract

In an influential paper, Frankel and Lee (1998) conclude that the stock return predictability of the value‐to‐price ratio (V/P) results from market mispricing. This paper confirms whether the V/P reflects the rational risk premiums associated with the V/P factor or is better explained by market inefficiency. Following Daniel and Titman (1997), this paper examines whether the V/P characteristics or the V/P factor loadings predict stock returns. The findings show that the V/P loadings are positively associated with average returns even after controlling for the V/P characteristics in both time series and cross‐sectional tests. The overall results suggest that the mispricing explanation of the V/P effect is premature.

Keywords: Asset‐pricing tests, Market efficiency, Mispricing, Risk, Value‐to‐price

Suggested Citation

Hwang, Lee-Seok and Lee, Woo-Jong, Stock Return Predictability of Residual‐Income‐Based Valuation: Risk or Mispricing? (June 2013). Abacus, Vol. 49, Issue 2, pp. 219-241, 2013. Available at SSRN: https://ssrn.com/abstract=2273957 or http://dx.doi.org/10.1111/abac.12007

Lee-Seok Hwang (Contact Author)

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Woo-Jong Lee

Seoul National University ( email )

Gwanak-ro 1, Gwanak-gu
Seoul, 151-916
Korea, Republic of (South Korea)

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