Non-Dividend Paying Stocks and the Negative Value Premium Discussant Sheng-Tang Huang

Summary of the paper  1. Because of constraints that restrict external financing, firms finance growth investments internally, but only when profitability permits. These investments increase risk.  2. Consistent with this model, the authors find high returns for high profitability, high market/book, growth-stocks. High return combined with high market/book is a negative value premium for non-dividend paying companies.

 3. When the authors benchmark the returns of portfolios formed by ranking forward ROE and return volatility against a conditional asset-pricing model, we find negative abnormal returns for low risk value-stocks and positive abnormal returns for high risk growth-stocks.

 4. While rational financial-economic analysis guides our empirical investigation, the authors cannot rule out market- inefficiency as an explanation for abnormal returns. Either equity-markets over-price low-risk stocks and under-price high-risk stocks or current asset-pricing models do not fully capture the negative value- premium for non-dividend paying companies.

Comments  This is a serious paper, and it provides interesting results to the literature.  Is value premium always positive? NO  It shows that, inconsistent with the conventional wisdoms, the value premium is negative for non-dividend paying stocks.  This is another idea to explain the value premium, except for risk, overreaction, and data mining.

A minor suggestion: Problem of equity valuation.  The authors follow the following paper to value equity.  G.W. Blazenko, and A.D. Pavlov. “Investment Timing for Dynamic Business Expansion,” Financial Management 38(6), (2009), pp p.841

However,  Liu (2009, JBF) shows that ROE is not correctly measurable. He suggests that the observable cost of equity only reflects equity normal profit rather than equity economic profit.  Therefore, the forward ROE used in this paper might be a misleading measure.  Another measure of forward ROE should be used for robustness purpose.

Reference  G.W. Blazenko, and A.D. Pavlov. “Investment Timing for Dynamic Business Expansion,” Financial Management 38(6), (2009), pp  Liu, “The slicing approach to valuing tax shield,” Journal of Banking & Finance33, (2009), pp

 Thank you for your listening.