BM, EM and the Value Premium

Joseph M. Goebel, Srinivasan Sundaram

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.

 


Keywords


Value premium; market risk premium; value and growth firms; book-to-market; size

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DOI: http://dx.doi.org/10.18533/ijbsr.v2i5.108

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International journal of business and social research (Print)
ISSN 2164-2540

International journal of business and social research (Online)
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[International Journal of Business and Social Research (IJBSR) previously published by MIR Center for Socio-Economic Research, MD, USA. From February 2018 this journal is published by the LAR Center Press, OR, USA]