The fundamental-to-market ratio and the value premium decline

Andrei S. Gonçalves and Gregory Leonard

Journal of Financial Economics, 2023, vol. 147, issue 2, 382-405

Abstract: Recent evidence indicates the value premium declined over time. We argue this decline happened because book equity, BE, is no longer a good proxy for fundamental equity, FE, defined as the present value of cash flows under a common discount rate across firms. Specifically, we estimate FE for public US firms over time and find that the premium associated with the fundamental-to-market ratio, FE/ME, subsumes the BE/ME premium and has been relatively stable while the cross-sectional correlation between FE/ME and BE/ME decreased over time, inducing an apparent decline in the value premium. We also show that FE/ME captures the value premium better than several alternative value signals beyond BE/ME.

Keywords: Value premium; Book-to-market; Value signals; The cross-section of expected returns (search for similar items in EconPapers)
JEL-codes: C58 E44 G10 G11 G12 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:147:y:2023:i:2:p:382-405

DOI: 10.1016/j.jfineco.2022.11.001

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