Volume 9, Number 3, Third Quarter 2011
Using AMEX, NASDAQ and NYSE stock market data for the period 1985-2006, this paper sheds further light into the value premium and the discussion of whether the value premium is driven by risk or behavioral factors. The paper utilizes a more comprehensive set of data and tests than previous studies and a research methodology that minimizes potential data snooping problems and confounding inferences. We document a consistently strong value premium in all markets examined, which persists in both bull and bear markets, as well as in recessions and recoveries. We show that the value premium is not driven by a few outliers, but it is pervasive as the overwhelming majority of stocks in the value portfolio have positive returns, and the majority of the industries in our sample have positive value premiums. The value premium, in general, remains positive and statistically significant over time. Our results are consistent with, but, in general, stronger than, those of other US studies. Previous studies’ results seem to be driven primarily by AMEX and NYSE stocks, as NASDAQ stocks experience much stronger value premium than other markets. In terms of explaining the drivers of the value premium, having looked at this question from many angles, we conclude that the evidence is mixed. It seems that both risk and mispricing may play a role in explaining the value premium, although the scale of the evidence seems to tilt more to the side of mispricing. The paper’s conclusions both with regards to the value premium and its drivers hold up well to various robustness tests.