Scale or yield? A present-value identity

Cho, Thummim, Kremens, Lukas, Lee, Dongryeol and Polk, Christopher (2024) Scale or yield? A present-value identity. Review of Financial Studies, 37 (3). 950 – 988. ISSN 0893-9454

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Abstract

We propose a loglinear present-value identity in which investment (“scale”), profitability (“yield”), and discount rates determine a firm’s market-to-book ratio. Our identity reconciles existing influential market-to-book decompositions and facilitates novel insights from three empirical applications: (1) Both investment and profitability are important contributors to the value spread and stock return news variance. (2) Any cross-sectional return predictability has a mirror image in cash-flow fundamentals, providing asset pricing theories with additional moments to match. (3) The investment spread significantly improves the predictability of time-series variation in the value premium and justifies the poor performance of value in recent years.

Item Type:	Article
Official URL:	https://academic.oup.com/rfs
Additional Information:	© 2023 The Author(s)
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Date Deposited:	20 Nov 2023 16:03
Last Modified:	21 Mar 2024 15:33
URI:	http://eprints.lse.ac.uk/id/eprint/120804

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