Brattle Principal Torben Voetmann has coauthored an article published in Financial Management that closely analyzes the mispricing component in market-to-book (MTB) ratios.
Previous research has found that stocks with low MTB ratios outperform stocks with high MTB ratios, and the MTB ratios can be separated into mispricing and growth options components. The article finds that the mispricing component predicts abnormal returns for up to five years and provides incremental information relative to existing asset pricing models. After controlling for mispricing, value no longer beats growth.
The full article, “Can Mispricing Explain the Value Premium?” is available in Financial Management.View Article