The Value Premium and the CAPM

We examine (1) how value premiums vary with firm size, (2) whether the CAPM explains value premiums, and (3) whether, in general, average returns compensate β in the way predicted by the CAPM. Loughran's (1997) evidence for a weak value premium among large firms is special to 1963 to 1995, U.S....

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Bibliographic Details
Published in:The Journal of finance (New York) 2006-10, Vol.61 (5), p.2163-2185
Main Authors: FAMA, EUGENE F., FRENCH, KENNETH R.
Format: Article
Language:English
Subjects:
Asset valuation
Beta
Capital Asset Pricing Model
Capital asset pricing models
CAPM
Economic value
Empirical tests
Expected returns
Financial models
Financial portfolios
Growth stocks
Model testing
Option pricing
P values
Price premiums
Rates of return
Regression analysis
Standard error
Stock exchanges
Stock prices
Stock returns
Studies
U.S.A
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Summary:We examine (1) how value premiums vary with firm size, (2) whether the CAPM explains value premiums, and (3) whether, in general, average returns compensate β in the way predicted by the CAPM. Loughran's (1997) evidence for a weak value premium among large firms is special to 1963 to 1995, U.S. stocks, and the book-to-market value-growth indicator. Ang and Chen's (2005) evidence that the CAPM can explain U.S. value premiums is special to 1926 to 1963. The CAPM's more general problem is that variation in β unrelated to size and the value-growth characteristic goes unrewarded throughout 1926 to 2004.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2006.01054.x