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

35 Pages Posted:

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

Asset pricing model research has been dominated by the book to price (HML) factor following its introduction in the Fama French 3 Factor model in 1992. Over the initial study horizon of 1963 to 1991, book to price delivered performance characteristics that essentially absorbed the cross-sectional return information of numerous other factors, including leverage and earnings to price, on an ex-ante basis. Ongoing refinements to asset pricing models tend to build upon the foundation of this initial three factor research, highlighting the broad acceptance of these specific factors when seeking to explain cross-sectional returns. It has also become commonplace to refer to book to price simultaneously as a valuation factor (cheap vs. expensive, Asness, Frazzini, Israel and Moskowitz, 2015), a style factor (value vs. growth, Zhang, 2015, as well as Russell, S&P, and Morningstar style methodologies), and a leverage factor (high vs. low leverage, Penman, Richardson, and Tuna, 2005). In this paper, we provide compelling evidence that asset pricing models based on direct measures of intrinsic value, stewardship (which loosely aligns with style based on the reliance on external financing for early-stage growth stocks and the return of capital to shareholders for mature value stocks) and leverage offer substantial improvements in minimizing residual alpha compared to models that conflate book to price as a proxy for these competing themes.

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=

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
123
Abstract Views
646
PlumX Metrics