BM, EM and the Value Premium

Joseph M. Goebel and Srinivasan Sundaram
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Joseph M. Goebel: Assistant Professor of Finance,Department of Finance and Insurance,Miller College of Business,Ball State University,Muncie, IN 47306-0345
Srinivasan Sundaram: Assistant Professor of Finance,Department of Finance and Insurance,Miller College of Business,Ball State University,Muncie, IN 47306-0345

International Journal of Business and Social Research, 2012, vol. 2, issue 5, 184-202

Abstract: Earnings-to-market (EM) and book-to-market (BM)measures do not serve as substitutes in accounting for size or in distinguishing between value and growth firms because (1) EM accounts for risks underlying the market risk premium (MRP) whereas BM does not; (2) the highest quintile of BM firms formed from ranked BM does not reflect the highest quintile of EM firms; (3) the pattern of size steadily decreasing with increases in BM is not found with increases in EM; (4) the range of implied discount rates and MRP derived for quintiles of firms formed from ranked EM is almost three times those derived from ranked BM; and (5) expected earnings growth falls but then dramatically rises with rising BM.

Keywords: Value premium; market risk premium; value and growth firms; book-to-market; size (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:mir:mirbus:v:2:y:2012:i:5:p:184-202

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