Abstract
This article provides evidence consistent with the hypothesis that the value risk premium results, at least in part, from investors’ incremental forecast difficulty for value stocks. The evidence includes the findings that (1) analysts’ uncertainty about earnings is consistently higher and their earnings forecast accuracy is consistently lower for value stocks, (2) value returns are higher when relative forecast difficulty for value stocks is greater, and (3) trading volume is greater for value stocks. If the relative difficultly in forecasting earnings for value stocks is consistent over time, the value stock premium should also be fairly consistent over time. Indeed, using a more refined definition of value, the author finds that the value stock return premium is far more consistent over time than is commonly believed and that it has been positive in recent years. TOPICS:Performance measurement, style investing, statistical methods Key Findings • Earnings are more difficult to predict for value stocks than for growth stocks. • The difficulty in forecasting earnings for value stocks is related to the value stock premium. • The value stock premium is larger and more consistent after controlling for industry.
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