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What Drives the Value Premium?: The Role of Asset Risk and Leverage


  • Jaewon Choi


This paper shows empirically how asset risk and financial leverage interact to explain the equity risk dynamics of value versus growth stocks. During economic downturns, the asset betas and leverage of value firms increase, contributing to a sharp rise in equity betas. Asset betas of growth firms are much less sensitive to economic conditions, and, consistent with the tradeoff theory of capital structure, growth firms are also less levered, contributing to the relative stability of their equity betas. By incorporating instruments that better capture beta dynamics, I show that the interactions of conditional betas with the market risk premium and volatility explain approximately 40% of the unconditional value premium. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail:, Oxford University Press.

Suggested Citation

  • Jaewon Choi, 2013. "What Drives the Value Premium?: The Role of Asset Risk and Leverage," Review of Financial Studies, Society for Financial Studies, vol. 26(11), pages 2845-2875.
  • Handle: RePEc:oup:rfinst:v:26:y:2013:i:11:p:2845-2875

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    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. Galvani, Valentina, 2018. "The Value Premium During Flights," Working Papers 2018-18, University of Alberta, Department of Economics.
    3. repec:ebl:ecbull:eb-18-00610 is not listed on IDEAS
    4. repec:eee:phsmap:v:513:y:2019:i:c:p:390-398 is not listed on IDEAS
    5. repec:eee:jbfina:v:86:y:2018:i:c:p:53-69 is not listed on IDEAS
    6. Rath, Subhrendu & Durand, Robert B., 2015. "Decomposing the size, value and momentum premia of the Fama–French–Carhart four-factor model," Economics Letters, Elsevier, vol. 132(C), pages 139-141.
    7. repec:bla:finmgt:v:47:y:2018:i:3:p:739-774 is not listed on IDEAS
    8. repec:bla:jfnres:v:42:y:2019:i:1:p:71-113 is not listed on IDEAS
    9. Jaewon Choi & Matthew P. Richardson & Robert F. Whitelaw, 2014. "On the Fundamental Relation Between Equity Returns and Interest Rates," NBER Working Papers 20187, National Bureau of Economic Research, Inc.
    10. repec:bla:eufman:v:25:y:2019:i:1:p:207-236 is not listed on IDEAS
    11. Choi, Jaewon & Richardson, Matthew, 2016. "The volatility of a firm's assets and the leverage effect," Journal of Financial Economics, Elsevier, vol. 121(2), pages 254-277.
    12. Lindaas, Knut F. & Simlai, Prodosh, 2014. "The value premium, aggregate risk innovations, and average stock returns," Finance Research Letters, Elsevier, vol. 11(3), pages 303-317.
    13. repec:eee:moneco:v:100:y:2018:i:c:p:16-34 is not listed on IDEAS
    14. repec:eco:journ1:2019-02-22 is not listed on IDEAS
    15. repec:eee:reveco:v:49:y:2017:i:c:p:168-189 is not listed on IDEAS

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