The Value Spread


  • Randolph B. Cohen,

  • Christopher Polk,

  • Tuomo Vuolteenaho

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    • Cohen is from Harvard Business School; Polk is from the Kellogg School of Management, Northwestern University; and Vuolteenaho is from the Department of Economics, Harvard University and the NBER. This paper subsumes the March 14, 1996, version of the paper titled “Will the Scaled-Price Effect in Stock Returns Continue?” We would like to thank Ken French and Grantham, Mayo, Van Otterloo & Co. for providing us with some of the data used in this study. We are grateful to Cliff Asness, Ron Bird, John Campbell, John Cochrane, Mike Cooper, Kent Daniel, Gene Fama, Ken French (referee), Bob Hodrick, Steve Kaplan, Matti Keloharju, Owen Lamont, Rafael Laporta, Andy Lutz, Andrei Shleifer, Jeremy Stein, and Maria Vassalou (discussant) for their suggestions. We received useful comments from the seminar participants at the NBER 2000 Summer Institute, GMO Research Conference, Harvard Business School brown bag lunch, Purdue University, and Chicago Quantitative Alliance 2001 Spring Meeting. We thank Qianqiu Liu for excellent research assistance.


We decompose the cross-sectional variance of firms' book-to-market ratios using both a long U.S. panel and a shorter international panel. In contrast to typical aggregate time-series results, transitory cross-sectional variation in expected 15-year stock returns causes only a relatively small fraction (20 to 25 percent) of the total cross-sectional variance. The remaining dispersion can be explained by expected 15-year profitability and persistence of valuation levels. Furthermore, this fraction appears stable across time and across types of stocks. We also show that the expected return on value-minus-growth strategies is atypically high at times when their spread in book-to-market ratios is wide.