Sources of the Value Premium

Peter Chinloy, Matthew Imes and Wendy Liu
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Peter Chinloy: Quant Advisors, Washington D.C., USA
Matthew Imes: Finance Department, School of Business Administration, Stetson University, USA
Wendy Liu: Department of Finance and Quantitative Methods, Gatton College of Business and Economics, University of Kentucky, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2023, vol. 26, issue 03, 1-33

Abstract: The book-to-market ratio’s numerator adds assets and liabilities differing in risk. We propose a test for the value premium and its sources. Individual balance sheet holdings are divided by firm size. When associated risk premium coefficients are equal, an overall book-to-market is appropriate. Otherwise, there are different risks in assets and liabilities.For U.S. firms, for four decades since 1980, the excess return is regressed on seven ratios relative to size for cash, receivables, tangibles, intangibles, payables, short and long-term debt, and controls. The seven value premiums are not equal. Firms earn higher returns for cash and receivables and lower for short-term debt. Tangible and intangible assets earn no value premium.

Keywords: Book-to-market; value; profitability; investment; cash; receivables (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S0219091523500182

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