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

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: 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