Implied returns, costly reversibility and the value premium Online publication date: Tue, 29-Jul-2014
by Joseph M. Goebel; Manoj V. Athavale
Global Business and Economics Review (GBER), Vol. 16, No. 3, 2014
Abstract: The countercyclical price of risk is revealed through declining earnings, dividends, equity book and equity market values, short-run earnings expectations and increasing market returns (k), risk premiums (MRP) and book-to-market (BM) with contractions. Consistent with costly reversibility, high BM firms with more fixed assets are less profitable and dispose of more fixed assets during contractions than low BM firms. Support for costly reversibility looking at k and MRP is found when firms are ranked according to fixed-asset-to-total-assets (FATA) but not BM. Low BM firms with generally lower k and MRP experience greater increases in k and MRP than high BM firms during contractions whereas high FATA firms with generally lower k and MRP experience greater increases in k and MRP than low FATA firms during contractions. With expected earnings growth increasing for high BM firms, BM as a measure to distinguish between growth and value is challenged. Thus, while support is provided for costly reversibility, it is limited in explaining the value premium.
Existing subscribers:
Go to Inderscience Online Journals to access the Full Text of this article.
If you are not a subscriber and you just want to read the full contents of this article, buy online access here.Complimentary Subscribers, Editors or Members of the Editorial Board of the Global Business and Economics Review (GBER):
Login with your Inderscience username and password:
Want to subscribe?
A subscription gives you complete access to all articles in the current issue, as well as to all articles in the previous three years (where applicable). See our Orders page to subscribe.
If you still need assistance, please email subs@inderscience.com
Our Blog 
Follow us on Twitter 
Visit us on Facebook