Scale or Yield? A Present-Value Identity

Thummim Cho, Lukas Kremens, Dongryeol Lee and Christopher Polk

The Review of Financial Studies, 2024, vol. 37, issue 3, 950-988

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.

Keywords: G11; G12 (search for similar items in EconPapers)
Date: 2024
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