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Breaking down value: a novel method

Author

Listed:
  • Mohammadreza Tavakoli Baghdadabad

    (Western Sydney University)

  • Girijasankar Mallik

    (Western Sydney University)

Abstract

This paper delves into the value premium in equity returns, exploring the superior performance of value stocks with high book-to-market ( $$\text{BM}$$ BM ) ratios over growth stocks. It introduces two novel decomposition models for $$\text{BM}$$ BM , incorporating Ball et al. (J Financ Econ 135:231–254, 2020)’s findings on the significance of the retained earnings-to-market ( $$\text{REM}$$ REM ) component. Through empirical analysis, the paper demonstrates REM’s predictive superiority over traditional $$\text{BM}$$ BM factors in forecasting stock returns, suggesting a shift toward $$\text{REM}$$ REM in asset pricing models. The research contributes to understanding the dynamics of the value premium, offering a refined methodological approach for evaluating firm value and equity returns.

Suggested Citation

  • Mohammadreza Tavakoli Baghdadabad & Girijasankar Mallik, 2025. "Breaking down value: a novel method," Empirical Economics, Springer, vol. 69(3), pages 1467-1525, September.
    • Handle: RePEc:spr:empeco:v:69:y:2025:i:3:d:10.1007_s00181-025-02769-2
    DOI: 10.1007/s00181-025-02769-2
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    References listed on IDEAS

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    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

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