Valuation Beta: Addressing Inadequacies of Book to Price with Intrinsic Value, Stewardship and Leverage

40 Pages Posted: 6 Jan 2021

See all articles by Rafael Resendes

Rafael Resendes

The Applied Finance Group, Ltd.

Daniel Obrycki

The Applied Finance Group, Ltd.

Derek Bergen

The Applied Finance Group, Ltd.

John Holt

The Applied Finance Group, Ltd.

Date Written: October 16, 2020

Abstract

A five-factor asset pricing model that incorporates direct measures of excess intrinsic value, financing yield, and leverage outperforms commonly studied models built solely upon book to price and dividend discount model frameworks. Excess intrinsic value captures firm value derived from discounted future economic profits net of the book equity reported on a firm’s balance sheet. Financing yield consolidates independent profitability and growth factors motivated from a dividend discount model framework into a single factor, untethering the incorrect assumption that predicts capital growth unconditionally leads to negative stock returns. A direct measure of leverage subsumes book to price over our study horizon. Studying the common ex-post horizon of the book to price factor and Applied Finance Intrinsic Value Factor provides compelling out-of-sample performance to support the theoretical motivation of a valuation-based approach to explain cross-sectional returns.

Keywords: Intrinsic Value, Valuation, Financing Yield, Stewardship, Leverage, Asset Pricing, Value, Book to Price

JEL Classification: G12

Suggested Citation

Resendes, Rafael and Obrycki, Daniel and Bergen, Derek and Holt, John, Valuation Beta: Addressing Inadequacies of Book to Price with Intrinsic Value, Stewardship and Leverage (October 16, 2020). Available at SSRN: https://ssrn.com/abstract=3713457 or http://dx.doi.org/10.2139/ssrn.3713457

Rafael Resendes

The Applied Finance Group, Ltd. ( email )

65 E. Wacker Place
Suite 1600
CHICAGO, IL 60601
United States
312-362-9903 (Phone)
312-362-0222 (Fax)

HOME PAGE: http://www.appliedfinance.com

Daniel Obrycki

The Applied Finance Group, Ltd. ( email )

65 E. Wacker Place
Suite 1600
CHICAGO, IL 60601
United States
312-362-9903 (Phone)
312-362-0222 (Fax)

HOME PAGE: http://www.appliedfinance.com

Derek Bergen (Contact Author)

The Applied Finance Group, Ltd. ( email )

65 E. Wacker Place
Suite 1600
CHICAGO, IL 60601
United States
3123629903 (Phone)
3123620222 (Fax)

HOME PAGE: http://www.appliedfinance.com

John Holt

The Applied Finance Group, Ltd. ( email )

65 E. Wacker Place
Suite 1600
CHICAGO, IL 60601
United States
312-362-9903 (Phone)
312-362-0222 (Fax)

HOME PAGE: http://www.appliedfinance.com

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