Swedroe On Large-Stock Value Premium

Recently, we have seen a rise in the level of discussion about whether there is a significant value premium in large-cap stocks. The value premium is the tendency of stocks with low prices relative to measures of their value to outperform stocks with high relative prices. Since large-cap stocks make up about 90 percent of the total global market capitalization, this is an important issue.

Professors Eugene Fama and Kenneth French examined this issue in their 2012 study, “Size, Value, and Momentum in International Stock Returns,” and found that there was a value premium in large-cap stocks of 0.17 percent per month. And while it wasn’t statistically significant—the t-stat was 1.09—a 2 percent per year premium is certainly economically significant. Other studies have found similar results, at least when ranking by price-to-book (P/B) ratio.

It’s also worth noting that the average return spread among large U.S. stocks sorted on P/B ratios was 38 basis points per month from July 1926 to June 1990 (the t-stat was 2.43), but shrank to just 5 basis points per month from July 1990 to June 2013 (the t-stat was 0.26).

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