There is A Growth Premium: Evidence from A Decomposition of Book-to-Market Ratio

49 Pages Posted: 19 Jun 2017 Last revised: 14 Apr 2020

See all articles by Yuecheng Jia

Yuecheng Jia

Central University of Finance and Economics (CUFE) - Chinese Academy of Finance and Development

Shu Yan

Oklahoma State University - Stillwater - Department of Finance

Haoxi Yang

Nankai University

Date Written: April 13, 2020

Abstract

This paper proposes a time series decomposition of book-to-market ratio (BM) into a trend component and an innovation component (I_BM). Under the framework of stock valuation with growth options, we demonstrate that I_BM is negatively related to the change of growth options and therefore negatively related to the expected stock return. We document significant empirical evidence consistent with a growth premium as low IBM stocks earn significantly higher future returns, even after adjustment for risk factors and controlling for other predictors. Moreover, low I_BM firms convert more growth options and take on higher financial leverage in the future.

Keywords: Book-to-Market Ratio, Growth Option, Growth Premium, Innovation, Stock Return

JEL Classification: G12

Suggested Citation

Jia, Yuecheng and Yan, Shu and Yang, Haoxi, There is A Growth Premium: Evidence from A Decomposition of Book-to-Market Ratio (April 13, 2020). Available at SSRN: https://ssrn.com/abstract=2988137 or http://dx.doi.org/10.2139/ssrn.2988137

Yuecheng Jia

Central University of Finance and Economics (CUFE) - Chinese Academy of Finance and Development ( email )

39 South College Road
Beijing
China

Shu Yan

Oklahoma State University - Stillwater - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States

Haoxi Yang (Contact Author)

Nankai University ( email )

Tongyan Road 38
Tianjin, Tianjin 300350
China

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