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Decomposing Value

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  • Joseph Gerakos
  • Juhani T. Linnainmaa

Abstract

Firms move between growth and value because of changes in either size or book value of equity. The value premium is specific to variation in book-to-market that emanates from size changes. A factor based on this variation earns the entire value premium; one based on the remaining variation earns no premium. Hence, not all high book-to-market firms earn the value premium, and some low book-to-market firms earn value-like returns. Many models price portfolios sorted by size and book-to-market. None distinguish firms that earn the value premium from those that have a high book-to-market but do not earn the premium. Received July 22, 2015; editorial decision June 29, 2017 by Editor Andrew Karolyi.

Suggested Citation

  • Joseph Gerakos & Juhani T. Linnainmaa, 2018. "Decomposing Value," The Review of Financial Studies, Society for Financial Studies, vol. 31(5), pages 1825-1854.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:5:p:1825-1854.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx118
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