The Value Premium

73 Pages Posted: 3 Dec 2002

See all articles by Lu Zhang

Lu Zhang

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

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Date Written: November 13, 2002


I investigate the economic determinants of risk and expected return within a neoclassic framework of industry equilibrium augmented with capital investment and aggregate uncertainty. Due to asymmetry in capital adjustment cost, assets-in-place is much riskier than growth option in bad times and growth option is riskier than assets-in-place only in good times and to a lesser extent. Coupled with a time-varying price of risk, this mechanism goes a long way in explaining the value premium puzzle, the coexistence of a high return dispersion and a low unconditional beta dispersion between value and growth stocks. The model also yields an array of new testable predictions both in the time series and cross-section.

Keywords: The Value Premium, Industry Equilibrium, Optimal Investment, Assets-in-Place, Growth Option, Asymmetric Adjustment Cost

JEL Classification: G1

Suggested Citation

Zhang, Lu, The Value Premium (November 13, 2002). Simon School of Business Working Paper No. FR 02-19, Available at SSRN: or

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