Breaking down value: a novel method

Mohammadreza Tavakoli Baghdadabad () and Girijasankar Mallik
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Mohammadreza Tavakoli Baghdadabad: Western Sydney University
Girijasankar Mallik: Western Sydney University

Empirical Economics, 2025, vol. 69, issue 3, No 13, 1467-1525

Abstract: Abstract This paper delves into the value premium in equity returns, exploring the superior performance of value stocks with high book-to-market ( $$\text{BM}$$ BM ) ratios over growth stocks. It introduces two novel decomposition models for $$\text{BM}$$ BM , incorporating Ball et al. (J Financ Econ 135:231–254, 2020)’s findings on the significance of the retained earnings-to-market ( $$\text{REM}$$ REM ) component. Through empirical analysis, the paper demonstrates REM’s predictive superiority over traditional $$\text{BM}$$ BM factors in forecasting stock returns, suggesting a shift toward $$\text{REM}$$ REM in asset pricing models. The research contributes to understanding the dynamics of the value premium, offering a refined methodological approach for evaluating firm value and equity returns.

Keywords: Book-to-market ratio; Book value components; Decomposing value; Value premium (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s00181-025-02769-2

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