Can mispricing explain the value premium?

Jeffrey F. Jaffe, Jan Jindra, David J. Pedersen, Torben Voetmann

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

Empirical research finds that stocks with low market-to-book (MTB) ratios outperform stocks with high MTB ratios. Rhodes-Kropf, Robinson, and Viswanathan separate the MTB ratio into mispricing and growth options components. We report that the mispricing component, but not the growth options component, predicts abnormal returns for up to 5 years. We also find that the mispricing component, but not the growth options component, provides incremental information relative to existing asset pricing models. Moreover, after controlling for mispricing, value no longer beats growth. Overall, our evidence is consistent with a behavioral explanation of the value premium.

Original languageEnglish (US)
Pages (from-to)615-633
Number of pages19
JournalFinancial Management
Volume49
Issue number3
DOIs
StatePublished - Sep 1 2020

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Keywords

  • G14
  • growth options
  • mispricing
  • return predictability
  • value premium

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