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1、THEJOURNALOFFINANCE•VOL.LXI,NO.5•OCTOBER2006TheValuePremiumandtheCAPMEUGENEF.FAMAandKENNETHR.FRENCH∗ABSTRACTWeexamine(1)howvaluepremiumsvarywithfirmsize,(2)whethertheCAPMexplainsvaluepremiums,and(3)whether,ingeneral,averagereturnscompensateβinthewaypredict
2、edbytheCAPM.Loughran’s(1997)evidenceforaweakvaluepremiumamonglargefirmsisspecialto1963to1995,U.S.stocks,andthebook-to-marketvalue-growthindicator.AngandChen’s(2005)evidencethattheCAPMcanexplainU.S.valuepremiumsisspecialto1926to1963.TheCAPM’smoregeneralprob
3、lemisthatvariationinβunrelatedtosizeandthevalue-growthcharacteristicgoesunrewardedthroughout1926to2004.FAMAANDFRENCH(1992),AMONGOTHERS,IDENTIFYAVALUEPREMIUMinU.S.stockre-turnsforthepost-1963period;thatis,stockswithhighratiosofthebookvalueofequitytothemarke
4、tvalueofequity(valuestocks)havehigheraveragereturnsthanstockswithlowbook-to-marketratios(growthstocks).Extendingthetestsbackto1926,Davis,Fama,andFrench(2000)documentavaluepremiumintheaveragereturnsoftheearlierperiod.Perhapsmoreimportant,FamaandFrench(1993)
5、findthatthepost-1963valuepremiumisleftunexplainedbytheCapitalAssetPricingModel(CAPM)ofSharpe(1964)andLintner(1965).AngandChen(2005)show,however,thattheCAPMcapturesthevaluepremiumofthe1926to1963period.Theyalsoarguethatwhenthetestsallowfortime-varyingmarketβ
6、s,eventhepost-1963periodproducesnoreliableevidenceagainstaCAPMstoryforthevaluepremium.Loughran(1997)arguesthatthevaluepremiumof1963to1995isinanycaseparticulartosmallstocks.Thispaperhasthreegoals.Thefirstistoprovideasimplepictureofhowvaluepremiumsvarywithfi
7、rmsize.ThesecondistoexamineifandwhenCAPMmarketβsexplainobservedvaluepremiums.Thethirdgoalistoexam-inewhetheringeneralvariationinβacrossstocksisrelatedtoaveragereturnsinthewaypredictedbytheCAPM.Ourresultsonhowthevaluepremiumvarieswithfirmsizeareeasilysum-ma
8、rized.Loughran’s(1997)evidencethatthereisnovaluepremiumamonglargestocksseemstobeparticularto(1)thepost-1963period,(2)usingthebook-to-marketratioasthevalue-growthindicator,and(3)restrictingtheteststoU.S.stocks
