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BM, EM and the Value Premium

Author

Listed:
  • Joseph M. Goebel

    (Assistant Professor of Finance,Department of Finance and Insurance,Miller College of Business,Ball State University,Muncie, IN 47306-0345)

  • Srinivasan Sundaram

    (Assistant Professor of Finance,Department of Finance and Insurance,Miller College of Business,Ball State University,Muncie, IN 47306-0345)

Abstract

Earnings-to-market (EM) and book-to-market (BM)measures do not serve as substitutes in accounting for size or in distinguishing between value and growth firms because (1) EM accounts for risks underlying the market risk premium (MRP) whereas BM does not; (2) the highest quintile of BM firms formed from ranked BM does not reflect the highest quintile of EM firms; (3) the pattern of size steadily decreasing with increases in BM is not found with increases in EM; (4) the range of implied discount rates and MRP derived for quintiles of firms formed from ranked EM is almost three times those derived from ranked BM; and (5) expected earnings growth falls but then dramatically rises with rising BM.

Suggested Citation

  • Joseph M. Goebel & Srinivasan Sundaram, 2012. "BM, EM and the Value Premium," International Journal of Business and Social Research, LAR Center Press, vol. 2(5), pages 184-202, October.
    • Handle: RePEc:lrc:larijb:v:2:y:2012:i:5:p:184-202
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