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Do expected business conditions explain the value premium?

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  • Fong, Wai Mun

Abstract

This study employs a new data set to re-examine the book-to-market effect. In contrast to past studies, a direct measure of expected business conditions is used to test whether the value premium is compatible with a risk-based explanation. The measure of expected business conditions is based on the Livingston survey of real GDP growth forecasts, and spans half a century. These forecasts are used to perform a comprehensive set of conditional (time series) and unconditional (cross-sectional) tests of the risk-based hypothesis. None of the tests provide firm evidence that the value premium can be explained by business risk. Evidence against the risk-based explanation is strongest for small firms.

Suggested Citation

  • Fong, Wai Mun, 2012. "Do expected business conditions explain the value premium?," Journal of Financial Markets, Elsevier, vol. 15(2), pages 181-206.
    • Handle: RePEc:eee:finmar:v:15:y:2012:i:2:p:181-206
    DOI: 10.1016/j.finmar.2011.08.004
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    Cited by:

    1. Eero Pätäri & Timo Leivo, 2017. "A Closer Look At Value Premium: Literature Review And Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 79-168, February.
    2. Kirby, Chris, 2019. "The value premium and expected business conditions," Finance Research Letters, Elsevier, vol. 30(C), pages 360-366.
    3. Hafiz Muhammad Zia ul haq & Muhammad Sohail Shafiq & Muhammad Kashif & Saba Ameer, 2020. "Determining Force behind Value Premium: The Case of Financial Leverage and Operating Leverage," JRFM, MDPI, vol. 13(9), pages 1-15, September.
    4. Lindaas, Knut F. & Simlai, Prodosh, 2014. "The value premium, aggregate risk innovations, and average stock returns," Finance Research Letters, Elsevier, vol. 11(3), pages 303-317.
    5. Hsieh, Hui-Ching & Nguyen, Van Quoc Thinh, 2021. "Economic policy uncertainty and illiquidity return premium," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    6. Clark, Ephraim & Qiao, Zhuo, 2020. "The value premium puzzle, behavior versus risk: New evidence from China," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 12-21.

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    More about this item

    Keywords

    Value premium; Business risk; GDP forecasts; Predictive regressions; Asset pricing;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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