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Scale or Yield? A Present-Value Identity

Author

Listed:
  • Thummim Cho
  • Lukas Kremens
  • Dongryeol Lee
  • Christopher Polk

Abstract

We propose a loglinear present-value identity in which investment (“scale”), profitability (“yield”), and discount rates determine a firm’s market-to-book ratio. Our identity reconciles existing influential market-to-book decompositions and facilitates novel insights from three empirical applications: (1) Both investment and profitability are important contributors to the value spread and stock return news variance. (2) Any cross-sectional return predictability has a mirror image in cash-flow fundamentals, providing asset pricing theories with additional moments to match. (3) The investment spread significantly improves the predictability of time-series variation in the value premium and justifies the poor performance of value in recent years.

Suggested Citation

  • Thummim Cho & Lukas Kremens & Dongryeol Lee & Christopher Polk, 2024. "Scale or Yield? A Present-Value Identity," The Review of Financial Studies, Society for Financial Studies, vol. 37(3), pages 950-988.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:3:p:950-988.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad068
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    More about this item

    Keywords

    G11; G12;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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