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Do expected business conditions explain the value premium?

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  • Fong, Wai Mun
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    Abstract

    This study employs a new data set to re-examine the book-to-market effect. In contrast to past studies, a direct measure of expected business conditions is used to test whether the value premium is compatible with a risk-based explanation. The measure of expected business conditions is based on the Livingston survey of real GDP growth forecasts, and spans half a century. These forecasts are used to perform a comprehensive set of conditional (time series) and unconditional (cross-sectional) tests of the risk-based hypothesis. None of the tests provide firm evidence that the value premium can be explained by business risk. Evidence against the risk-based explanation is strongest for small firms.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Markets.

    Volume (Year): 15 (2012)
    Issue (Month): 2 ()
    Pages: 181-206

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    Handle: RePEc:eee:finmar:v:15:y:2012:i:2:p:181-206

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    Web page: http://www.elsevier.com/locate/finmar

    Related research

    Keywords: Value premium; Business risk; GDP forecasts; Predictive regressions; Asset pricing;

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