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

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 investmentspecific technology shocks, and analysts’ risk ratings derive from the unpriced valueto- 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 marketto- value component. Overall, our evidence casts doubt on several value premium theories."