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Rationalizing the Value Premium under Economic Fundamentals in an Emerging Market

Author

Listed:
  • M. Eskandar Shah

    (International Islamic University Malaysia
    Bangor Business School)

  • Sourafel Girm

    (University of Nottingham)

  • R. Hudson

    (Newcastle University)

Abstract

This paper studies the value anomaly in the context of Malaysia, an emerging economy with a top heavy, closely held, and state-owned institutional setting. We attribute the anomaly to the investment pattern of growth firms. Our empirical analysis illustrates that growth firms have a tendency to hoard cash, delaying the undertaking of their growth options, especially in poor economic environments. This mitigates their business risk, but lowers their market valuation, driving down their returns. Our hypothesis has the advantage of reconciling the diverging views on the causes of the value premium stemming from the neoclassical and behavioural perspectives.

Suggested Citation

  • M. Eskandar Shah & Sourafel Girm & R. Hudson, 2012. "Rationalizing the Value Premium under Economic Fundamentals in an Emerging Market," Working Papers 12010, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    • Handle: RePEc:bng:wpaper:12010
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    File URL: http://www.bangor.ac.uk/business/research/documents/BBSWP12010.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Asset Pricing; Growth (i.e.; Glamour) Stocks; Multifactor Models; Real Options; Value (i.e.; Unspectacular) Stocks.;
    All these keywords.

    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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