Rationalizing the value premium in emerging markets

M. Shahid Ebrahim; Sourafel Girma; M. Eskandar Shah; Jonathan Williams

doi:10.1016/j.intfin.2013.11.005

Rationalizing the value premium in emerging markets

M. Shahid Ebrahim^*, Sourafel Girma, M. Eskandar Shah, Jonathan Williams

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

15 Citations (Scopus)

Abstract

We reconfirm the presence of value premium in emerging markets. Using the Brazil-Turkey-India-China (BTIC) grouping during a period of substantial economic growth and stock market development, we attribute the premium to the investment patterns of glamour firms. We conjecture based on empirical evidence that glamour firms hoard cash, which delays undertaking of growth options, especially in poor economic conditions. Whilst this helps to mitigate business risk, it lowers market valuations and drives down expected returns. Our evidence supports arguments that the value premium is explained by economic fundamentals rather than a risk factor that is common to all firms.

Original language	English
Pages (from-to)	51-70
Number of pages	20
Journal	Journal of International Financial Markets, Institutions and Money
Volume	29
Issue number	1
DOIs	https://doi.org/10.1016/j.intfin.2013.11.005
Publication status	Published - Mar 2014
Externally published	Yes

Keywords

Asset pricing
Growth (i.e., glamour) stocks
Multifactor models
Real options
Value (i.e., unspectacular) stocks

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10.1016/j.intfin.2013.11.005

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abstract = "We reconfirm the presence of value premium in emerging markets. Using the Brazil-Turkey-India-China (BTIC) grouping during a period of substantial economic growth and stock market development, we attribute the premium to the investment patterns of glamour firms. We conjecture based on empirical evidence that glamour firms hoard cash, which delays undertaking of growth options, especially in poor economic conditions. Whilst this helps to mitigate business risk, it lowers market valuations and drives down expected returns. Our evidence supports arguments that the value premium is explained by economic fundamentals rather than a risk factor that is common to all firms.",

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AB - We reconfirm the presence of value premium in emerging markets. Using the Brazil-Turkey-India-China (BTIC) grouping during a period of substantial economic growth and stock market development, we attribute the premium to the investment patterns of glamour firms. We conjecture based on empirical evidence that glamour firms hoard cash, which delays undertaking of growth options, especially in poor economic conditions. Whilst this helps to mitigate business risk, it lowers market valuations and drives down expected returns. Our evidence supports arguments that the value premium is explained by economic fundamentals rather than a risk factor that is common to all firms.

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KW - Growth (i.e., glamour) stocks

KW - Multifactor models

KW - Real options

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Rationalizing the value premium in emerging markets

Abstract

Keywords

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