Review of Financial Studies Vol. 37 No. 3 2024
Scale or Yield? A Present-Value Identity
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.
- DOI
- 10.1093/rfs/hhad068
- Volume
- 37
- Issue
- 3
- Pages
- 950-988
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref