Affiliation:
1. Korea University Business School , Korea
2. University of Washington , USA
3. UCLA Anderson , USA
4. London School of Economics , UK
Abstract
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.
Received January 30, 2022; editorial decision June 6, 2023 by Editor Itay Goldstein. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online
Publisher
Oxford University Press (OUP)
Subject
Economics and Econometrics,Finance,Accounting