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Can mispricing explain the value premium?

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  • Jeffrey F. Jaffe
  • Jan Jindra
  • David J. Pedersen
  • Torben Voetmann

Abstract

Empirical research finds that stocks with low market‐to‐book (MTB) ratios outperform stocks with high MTB ratios. Rhodes‐Kropf, Robinson, and Viswanathan separate the MTB ratio into mispricing and growth options components. We report that the mispricing component, but not the growth options component, predicts abnormal returns for up to 5 years. We also find that the mispricing component, but not the growth options component, provides incremental information relative to existing asset pricing models. Moreover, after controlling for mispricing, value no longer beats growth. Overall, our evidence is consistent with a behavioral explanation of the value premium.

Suggested Citation

  • Jeffrey F. Jaffe & Jan Jindra & David J. Pedersen & Torben Voetmann, 2020. "Can mispricing explain the value premium?," Financial Management, Financial Management Association International, vol. 49(3), pages 615-633, September.
    • Handle: RePEc:bla:finmgt:v:49:y:2020:i:3:p:615-633
    DOI: 10.1111/fima.12272
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    References listed on IDEAS

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    Cited by:

    1. Merkle, Christoph & Sextroh, Christoph J., 2021. "Value and momentum from investors’ perspective: Evidence from professionals’ risk-ratings," Journal of Empirical Finance, Elsevier, vol. 62(C), pages 159-178.

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