Breaking down value: a novel method

This paper delves into the value premium in equity returns, exploring the superior performance of value stocks with high book-to-market (BM) ratios over growth stocks. It introduces two novel decomposition models for BM, incorporating Ball et al. (J Financ Econ 135:231–254, 2020)’s findings on the significance of the retained earnings-to-market (REM) component. Through empirical analysis, the paper demonstrates REM’s predictive superiority over traditional BM factors in forecasting stock returns, suggesting a shift toward REM in asset pricing models. The research contributes to understanding the dynamics of the value premium, offering a refined methodological approach for evaluating firm value and equity returns.