Where Is the Risk in Value? Evidence From a Market-to-Book Decomposition

132 Pages Posted: 14 Dec 2015 Last revised: 5 Jul 2019

See all articles by Andrey Golubov

Andrey Golubov

University of Toronto - Rotman School of Management

Theodosia Konstantinidi

City University London - Sir John Cass Business School

Date Written: July 3, 2019

Abstract

We study the value premium using the multiples-based market-to-book decomposition of Rhodes-Kropf, Robinson, and Viswanathan (2005). The market-to-value component drives all of the value strategy return, while the value-to-book component exhibits no return predictability in either portfolio sorts or firm-level regressions. Existing results linking market-to-book to operating leverage, duration, exposure to investment-specific technology shocks, and analysts’ risk ratings derive from the unpriced value-to-book component. In contrast, results on expectation errors, limits to arbitrage, and certain types of cash flow risk and consumption risk exposure are due to the market-to-value component. Overall, our evidence casts doubt on several value premium theories.

Keywords: Value Premium, Market-to-Book Decomposition, Risk Exposure, Expectation Errors, Limits to Arbitrage

JEL Classification: G12, G14

Suggested Citation

Golubov, Andrey and Konstantinidi, Theodosia, Where Is the Risk in Value? Evidence From a Market-to-Book Decomposition (July 3, 2019). Journal of Finance, Forthcoming; 27th Annual Conference on Financial Economics and Accounting Paper; Rotman School of Management Working Paper No. 2702822. Available at SSRN: https://ssrn.com/abstract=2702822 or http://dx.doi.org/10.2139/ssrn.2702822

Andrey Golubov (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Theodosia Konstantinidi

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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