Philosophy

Capital asset pricing model

Statistics

Predictability

Portfolio

Arbitrage

Economics

Component (thermodynamics)

Market value

Risk premium

Decomposition

Operating leverage

Value premium

Intrinsic value (animal ethics)

Market portfolio

Thermodynamics

Physics

Organic chemistry

Environmental ethics

Mathematics

Systematic risk

Value (mathematics)

Profitability index

Econometrics

Leverage (statistics)

Risk management

Financial economics

Cash flow

Chemistry

Finance

Value at risk

The Journal of Finance

ABSTRACT We study the value premium using the multiples‐based market‐to‐book decomposition of Rhodes‐Kropf, Robinson, and Viswanathan (2005). The market‐to‐value component drives all of the value strategy return, while the value‐to‐book component exhibits no return predictability in either portfolio sorts or firm‐level regressions. Existing results linking market‐to‐book to operating leverage, duration, exposure to investment‐specific technology shocks, and analysts’ risk ratings derive from the unpriced value‐to‐book component. In contrast, results on expectation errors, limits to arbitrage, and certain types of cash flow risk and consumption risk exposure are due to the market‐to‐value component. Overall, our evidence casts doubt on several value premium theories.

Where Is the Risk in Value? Evidence from a Market‐to‐Book Decomposition