Is There a Value Premium Among Large Stocks?

Abstract

Fama and French (2012) find no significant global value premium among large stocks. Two simple departures from their methodology restore such premium: sorting stocks on price-to-earnings rather than price-to-book ratios, and using global rather than regional value breakpoints. The resulting global value premium among large stocks, measured as the return spread between top 30% and bottom 30% stocks, increases from 17 (t-stat=1.09) to 64 (t-stat=2.61) basis points per month. Using price-to-earnings computed from earnings estimates rather than historical earnings further sharpens the global value effect among large stocks. Not confined to small stocks, the value premium remains a highly economically significant phenomenon. Because valuation ratios are not interchangeable, researchers should consider looking beyond price-to-book when studying, or controlling for, the value effect.

Keywords: value premium, valuation ratios, global investing