Is Industry-Specific Value Premium Declining? Evidence from India

Abstract

This article examines whether the literature promised value effect exists and the changing nature of value premium at the industry level. It also determines the value premium’s strength by controlling the January effect within and across the regulated industry groups. This is done by utilizing the two most prominent pricing models: Fama–French three- and five-factor, considering all listed firms trading at BSE India between 1999 and 2020. The results show that a significant value effect exists in 15 of the 17 regulated industry groups over 21.5 years, while sub-period analysis revealed variation in the value effect at industry-based portfolio returns. We developed quintile and multivariate portfolios within and across the industries. Results show that the industry-specific value premium has been relatively low in the current decade due to decreasing industry portfolio returns and increasing P/B ratios within industry groups. The study also used the GRS test to explore the explanatory power of models. Results indicated that the explanatory power of models has declined in post-crisis periods. While controlling the January effect, the value premium has slightly diminished within and across the industry groups in the recent decade. We also observed that investors who seek to allocate assets within and across industries are likely to have potentially predictable and pretty stable returns. While other countries have found industry-specific value premiums, no such study has been conducted in India. As a first attempt, these findings are relevant for investors and academia.