Explaining The Value Effect In Emerging Markets

Explaining the Value Effect in Emerging Markets: Tangible vs Intangible Information

Douglas W. Blackburn and Nusret Cakici

A version of this paper can be found here.

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What are the research questions

To most readers, it’s no surprise that our ears perk up a little bit anytime someone attempts to broaden the understanding of the value anomaly.The precise reason why high book to market equities have higher expected returns has been along-standing debate among academics. There are two primary explanations: The first explanation postulates that the excess returns generated by the high book to market stocks are due to additional risk.(1) In contrast with that, an alternative view argues that the value anomaly is due to mispricing caused by a systematic overreaction to negative news (on average).(2) What both of these theories have in common is that firms deteriorating accounting fundamentals drive the increased risk, or the overreaction to bad news. For a deeper dive into these arguments please take a look at an earlier post by Larry Swedroe titled: The Value Premium: Risk or Mispricing?

Daniel and Titman in their 2006 paper, “Market Reactions to Tangible and Intangible Information,” (3) argue that a firm’s future performance isn’t related to past accounting performance.Rather Daniel and Titman conclude that performance is related to past intangible information (information outside of accounting changes) – which is a result that is inconsistent with both the risk and overreaction hypotheses.The authors of this paper, Blackburn and Cakici, expand on Daniel and Titman’s research and explore the value anomaly in the realm of emerging markets, and ask the following:

Do emerging markets have a consistent message that can narrow down what is driving the higher expected returns of high book to market stocks?

Can they find the one “true” factor that explains the value anomaly across all markets?

If the research finds that emerging markets have a relationship with tangible information, is the additional return due to risk or the overreaction hypothesis?