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Decomposing Value

Joseph Gerakos^1,2; Juhani T. Linnainmaa³

¹ Dartmouth Hospital · ² Dartmouth College · ³ University of Southern California

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.

DOI

10.1093/rfs/hhx118

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en

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