• The Sources of Value Premiums- Fundamental Analysis Approach

Abstract

Value firms, which offer high book-to-market ratios, tend to outperform growth firms that are accompanied with low book-to-market ratios. Two well-known explanations for such value premiums have been proposed: risk compensation and investment behavior. Based on the fundamental measures in Piotroski (2000), we examine the source of value premium. Because firms with good fundamentals (i.e., high scoring of the fundamental measures) tend to be less risky and more profitable, we are able to determine with fundamental analysis, whether these risks or behaviors account for the difference between value premiums. We find that value firms with good fundamentals consistently outperform the benchmark according to investment behavior, not risk compensation.

Keyword: Value firms, Fundamental analysis, B/M ratio