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Stock Return Predictability of Residual‐Income‐Based Valuation: Risk or Mispricing?
Author(s) -
Hwang LeeSeok,
Lee WooJong
Publication year - 2013
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/abac.12007
Subject(s) - predictability , inefficiency , economics , econometrics , stock (firearms) , valuation (finance) , financial economics , residual , stock market , statistics , mathematics , finance , mechanical engineering , paleontology , algorithm , horse , engineering , biology , microeconomics
In an influential paper, F rankel and L ee (1998) conclude that the stock return predictability of the value‐to‐price ratio ( V / P ) results from market mispricing. This paper confirms whether the V / P reflects the rational risk premiums associated with the V / P factor or is better explained by market inefficiency. Following D aniel and T itman (1997), this paper examines whether the V / P characteristics or the V / P factor loadings predict stock returns. The findings show that the V / P loadings are positively associated with average returns even after controlling for the V / P characteristics in both time series and cross‐sectional tests. The overall results suggest that the mispricing explanation of the V / P effect is premature.