IDEAS home Printed from https://ideas.repec.org/p/bng/wpaper/13010.html
   My bibliography  Save this paper

Rationalizing the Value Premium in Emerging Markets

Author

Listed:
  • M. Shahid Embrahim

    (Bangor University, UK)

  • Sourafel Girma

    (University of Nottingham)

  • M. Eskander Shah

    (International Centre for Education in Islamic Finance)

  • Jonathan Williams

    (Bangor University, UK)

Abstract

We reconfirm the presence of value premium in emerging markets. Using the Brazil-Turkey-India-China (BTIC) grouping during a period of substantial economic growth and stock market development, we attribute the premium to the investment patterns of glamour firms. We conjecture based on empirical evidence that glamour firms hoard cash, which delays undertaking of growth options, especially in poor economic conditions. Whilst this helps to mitigate business risk, it lowers market valuations and drives down expected returns. Our evidence supports arguments that the value premium is explained by economic fundamentals rather than a risk factor that is common to all firms.

Suggested Citation

  • M. Shahid Embrahim & Sourafel Girma & M. Eskander Shah & Jonathan Williams, 2013. "Rationalizing the Value Premium in Emerging Markets," Working Papers 13010, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    • Handle: RePEc:bng:wpaper:13010
    as

    Download full text from publisher

    File URL: http://www.bangor.ac.uk/business/research/documents/BBSWP13010.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. "Contrarian Investment, Extrapolation, and Risk," Journal of Finance, American Finance Association, vol. 49(5), pages 1541-1578, December.
    3. Huseyin Gulen & Yuhang Xing & Lu Zhang, 2011. "Value versus Growth: Time‐Varying Expected Stock Returns," Financial Management, Financial Management Association International, vol. 40(2), pages 381-407, June.
    4. Eugene F. Fama & Kenneth R. French, 1998. "Value versus Growth: The International Evidence," Journal of Finance, American Finance Association, vol. 53(6), pages 1975-1999, December.
    5. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," The Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
    6. John M. Griffin & Michael L. Lemmon, 2002. "Book‐to‐Market Equity, Distress Risk, and Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2317-2336, October.
    7. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    8. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-558, June.
    9. Basu, Sanjoy, 1983. "The relationship between earnings' yield, market value and return for NYSE common stocks : Further evidence," Journal of Financial Economics, Elsevier, vol. 12(1), pages 129-156, June.
    10. Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1992. "Waiting to Invest: Investment and Uncertainty," The Journal of Business, University of Chicago Press, vol. 65(1), pages 1-29, January.
    11. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    12. Edward Lee & Weimin Liu & Norman Strong, 2007. "UK Evidence on the Characteristics versus Covariance Debate," European Financial Management, European Financial Management Association, vol. 13(4), pages 742-756, September.
    13. Roll, Richard, 1977. "A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory," Journal of Financial Economics, Elsevier, vol. 4(2), pages 129-176, March.
    14. La Porta, Rafael, et al, 1997. "Good News for Value Stocks: Further Evidence on Market Efficiency," Journal of Finance, American Finance Association, vol. 52(2), pages 859-874, June.
    15. Blume, Marshall E & Friend, Irwin, 1973. "A New Look at the Capital Asset Pricing Model," Journal of Finance, American Finance Association, vol. 28(1), pages 19-33, March.
    16. de Groot, Caspar G. M. & Verschoor, Willem F. C., 2002. "Further evidence on Asian stock return behavior," Emerging Markets Review, Elsevier, vol. 3(2), pages 179-193, June.
    17. Davis, James L, 1994. "The Cross-Section of Realized Stock Returns: The Pre-COMPUSTAT Evidence," Journal of Finance, American Finance Association, vol. 49(5), pages 1579-1593, December.
    18. Chen, Nai-fu & Zhang, Feng, 1998. "Risk and Return of Value Stocks," The Journal of Business, University of Chicago Press, vol. 71(4), pages 501-535, October.
    19. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    20. Bhandari, Laxmi Chand, 1988. " Debt/Equity Ratio and Expected Common Stock Returns: Empirical Evidence," Journal of Finance, American Finance Association, vol. 43(2), pages 507-528, June.
    21. Xiafei Li & Chris Brooks & Joëlle Miffre, 2009. "The Value Premium and Time-Varying Volatility," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(9-10), pages 1252-1272.
    22. Kim, Bonghoon & Kenny, Lawrence W., 2007. "Explaining when developing countries liberalize their financial equity markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(4), pages 387-402, October.
    23. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    24. Guo, Hui & Savickas, Robert & Wang, Zijun & Yang, Jian, 2009. "Is the Value Premium a Proxy for Time-Varying Investment Opportunities? Some Time-Series Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(1), pages 133-154, February.
    25. Fama, Eugene F & French, Kenneth R, 1995. "Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-155, March.
    26. De Bondt, Werner F M & Thaler, Richard H, 1987. "Further Evidence on Investor Overreaction and Stock Market Seasonalit y," Journal of Finance, American Finance Association, vol. 42(3), pages 557-581, July.
    27. Kothari, S P & Shanken, Jay & Sloan, Richard G, 1995. "Another Look at the Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 185-224, March.
    28. Jennifer Conrad & Michael Cooper & Gautam Kaul, 2003. "Value versus Glamour," Journal of Finance, American Finance Association, vol. 58(5), pages 1969-1996, October.
    29. Cohen, Randolph B. & Gompers, Paul A. & Vuolteenaho, Tuomo, 2002. "Who underreacts to cash-flow news? evidence from trading between individuals and institutions," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 409-462.
    30. K. Geert Rouwenhorst, 1999. "Local Return Factors and Turnover in Emerging Stock Markets," Journal of Finance, American Finance Association, vol. 54(4), pages 1439-1464, August.
    31. Ding, David K. & Chua, Jia Leng & Fetherston, Thomas A., 2005. "The performance of value and growth portfolios in East Asia before the Asian financial crisis," Pacific-Basin Finance Journal, Elsevier, vol. 13(2), pages 185-199, March.
    32. Bekaert, Geert & Harvey, Campbell R., 2003. "Emerging markets finance," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 3-56, February.
    33. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    34. Barber, Brad M & Lyon, John D, 1997. "Firm Size, Book-to-Market Ratio, and Security Returns: A Holdout Sample of Financial Firms," Journal of Finance, American Finance Association, vol. 52(2), pages 875-883, June.
    35. Barry, Christopher B. & Goldreyer, Elizabeth & Lockwood, Larry & Rodriguez, Mauricio, 2002. "Robustness of size and value effects in emerging equity markets, 1985-2000," Emerging Markets Review, Elsevier, vol. 3(1), pages 1-30, March.
    36. John Lintner, 1965. "Security Prices, Risk, And Maximal Gains From Diversification," Journal of Finance, American Finance Association, vol. 20(4), pages 587-615, December.
    37. Lu Zhang, 2005. "The Value Premium," Journal of Finance, American Finance Association, vol. 60(1), pages 67-103, February.
    38. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    39. MacKinlay, A. Craig, 1995. "Multifactor models do not explain deviations from the CAPM," Journal of Financial Economics, Elsevier, vol. 38(1), pages 3-28, May.
    40. De Bondt, Werner F M & Thaler, Richard, 1985. "Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
    41. Banz, Rolf W & Breen, William J, 1986. "Sample-Dependent Results Using Accounting and Market Data: Some Evidence," Journal of Finance, American Finance Association, vol. 41(4), pages 779-793, September.
    42. Daniel, Kent & Titman, Sheridan, 1997. "Evidence on the Characteristics of Cross Sectional Variation in Stock Returns," Journal of Finance, American Finance Association, vol. 52(1), pages 1-33, March.
    43. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    44. Yen, Jenn Yaw & Sun, Qian & Yan, Yuxing, 2004. "Value versus growth stocks in Singapore," Journal of Multinational Financial Management, Elsevier, vol. 14(1), pages 19-34, February.
    45. Jennifer Conrad & Michael Cooper & Gautam Kaul, 2003. "Value versus Glamour," Journal of Finance, American Finance Association, vol. 58(5), pages 1969-1995, October.
    46. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    47. Titman, Sheridan & Wei, K. C. John & Xie, Feixue, 2004. "Capital Investments and Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(4), pages 677-700, December.
    48. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    49. Stivers, Chris & Sun, Licheng, 2010. "Cross-Sectional Return Dispersion and Time Variation in Value and Momentum Premiums," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(4), pages 987-1014, August.
    50. Basu, S, 1977. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis," Journal of Finance, American Finance Association, vol. 32(3), pages 663-682, June.
    51. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    52. Geert Bekaert & Campbell Harvey & Christian T. Lundblad, 2003. "Equity market liberalization in emerging markets," Review, Federal Reserve Bank of St. Louis, vol. 85(Jul), pages 53-74.
    53. Titman, Sheridan, 1985. "Urban Land Prices under Uncertainty," American Economic Review, American Economic Association, vol. 75(3), pages 505-514, June.
    54. Chan, Louis K. C. & Jegadeesh, Narasimhan & Lakonishok, Josef, 1995. "Evaluating the performance of value versus glamour stocks The impact of selection bias," Journal of Financial Economics, Elsevier, vol. 38(3), pages 269-296, July.
    55. Ilia D. Dichev, 1998. "Is the Risk of Bankruptcy a Systematic Risk?," Journal of Finance, American Finance Association, vol. 53(3), pages 1131-1147, June.
    56. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fukuta, Yuichi & Yamane, Akiko, 2015. "Value premium and implied equity duration in the Japanese stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 39(C), pages 102-121.
    2. Akber Aman Shah & Desheng Wu & Vladmir Korotkov, 2019. "Are Sustainable Banks Efficient and Productive? A Data Envelopment Analysis and the Malmquist Productivity Index Analysis," Sustainability, MDPI, vol. 11(8), pages 1-19, April.
    3. Ripamonti, Alexandre & Silva, Diego & Moreira Neto, Eurico, 2018. "Asset Pricing and Asymmetric Information," MPRA Paper 87403, University Library of Munich, Germany.
    4. Harshita & Shveta Singh & Surendra S. Yadav, 2018. "Changing Nature of the Value Premium in the Indian Stock Market," Vision, , vol. 22(2), pages 135-143, June.
    5. Qadan, Mahmoud & Jacob, Maram, 2022. "The value premium and investors' appetite for risk," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 194-219.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. M. Eskandar Shah & Sourafel Girm & R. Hudson, 2012. "Rationalizing the Value Premium under Economic Fundamentals in an Emerging Market," Working Papers 12010, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    2. Eero Pätäri & Timo Leivo, 2017. "A Closer Look At Value Premium: Literature Review And Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 79-168, February.
    3. Fernando Rubio, 2005. "Eficiencia De Mercado, Administracion De Carteras De Fondos Y Behavioural Finance," Finance 0503028, University Library of Munich, Germany, revised 23 Jul 2005.
    4. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, December.
    5. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    6. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
    7. Committee, Nobel Prize, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.
    8. Stephen A. Gorman & Frank J. Fabozzi, 2021. "The ABC’s of the alternative risk premium: academic roots," Journal of Asset Management, Palgrave Macmillan, vol. 22(6), pages 405-436, October.
    9. George Leledakis & Ian Davidson & George Karathanassis, 2003. "Cross-sectional estimation of stock returns in small markets: The case of the Athens Stock Exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 13(6), pages 413-426.
    10. Christian Walkshäusl & Sebastian Lobe, 2014. "The Alternative Three†Factor Model: An Alternative beyond US Markets?," European Financial Management, European Financial Management Association, vol. 20(1), pages 33-70, January.
    11. Stefan Nagel, 2013. "Empirical Cross-Sectional Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 167-199, November.
    12. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    13. Ray Ball & Gil Sadka & Ayung Tseng, 2022. "Using accounting earnings and aggregate economic indicators to estimate firm-level systematic risk," Review of Accounting Studies, Springer, vol. 27(2), pages 607-646, June.
    14. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
    15. Gabriel Hawawini & Donald B. Keim, "undated". "The Cross Section of Common Stock Returns: A Review of the Evidence and Some New Findings," Rodney L. White Center for Financial Research Working Papers 08-99, Wharton School Rodney L. White Center for Financial Research.
    16. Martin Wallmeier, 2000. "Determinanten erwarteter Renditen am deutschen Aktienmarkt — Eine empirische Untersuchung anhand ausgewählter Kennzahlen," Schmalenbach Journal of Business Research, Springer, vol. 52(1), pages 27-57, February.
    17. repec:fau:fauart:v:65:y:2015:i:1:p:84-104 is not listed on IDEAS
    18. Ding, David K. & Chua, Jia Leng & Fetherston, Thomas A., 2005. "The performance of value and growth portfolios in East Asia before the Asian financial crisis," Pacific-Basin Finance Journal, Elsevier, vol. 13(2), pages 185-199, March.
    19. Jennifer Conrad & Michael Cooper & Gautam Kaul, 2003. "Value versus Glamour," Journal of Finance, American Finance Association, vol. 58(5), pages 1969-1996, October.
    20. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    21. Sonntag, Dominik, 2018. "Die Theorie der fairen geometrischen Rendite [The Theory of Fair Geometric Returns]," MPRA Paper 87082, University Library of Munich, Germany.

    More about this item

    Keywords

    Asset Pricing; Growth (i.e.; Glamour) Stocks; Multifactor Models; Real Options; Value (i.e.; Unspectacular) Stocks.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bng:wpaper:13010. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Alan Thomas (email available below). General contact details of provider: https://edirc.repec.org/data/sabanuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.