Value Premium and Equity Term Structures of Value and Growth Firms

Abstract

This paper studies the impact of information processing and learning about expected future cashflows on the level and timing of risk premiums in the cross-section of firms. Learning with information sources of different qualities endogenously generates value firms, growth firms, and a value premium in equilibrium. Furthermore, the learning model predicts an upward-sloping equity term structure for value firms, and a flat (moderately downward-sloping) equity term structure for growth firms. Using earnings, return, and news data on value and growth firms, we show that the predictions of the learning model are consistent with the data.

Keywords: Asset Pricing, Information Acquisition, Learning, Value Premium, Equity Term Structures of Value and Growth Firms

JEL Classification: D51, D53, D83, G12