Abstract
In this paper, we revisit the value premium puzzle and hypothesize that the value premium is driven by the arrival of new information specifically the news in earnings announcements. Consistent with our hypothesis, we find that a portfolio that takes positions among stocks only 5% of the year (the earnings window) contains 13% of the value premium. Furthermore, we find that there is no differential premium between value stocks and growth stocks during the non-earnings announcement periods. In other words, the other 87% of the value premium is not statistically different from the return on a risk-free portfolio. We find that the earnings-value premium, surrounding the earnings announcement window, is 10.7 basis points per trading day (26.96% per year) between June 1987 and December 2010. To investigate the value premium further, we test whether the value premium primarily persists for neglected firms who are characterized by a weaker information environment. Using three different proxies for neglect, we document that the differential premium between value and growth stocks is more for neglected firms. This evidence indicates that the value premium is primarily driven by the markets incorporation of newly released information in earnings announcements.
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