Finance Seminar（2018-20）

Topic: A Unified Economic Explanation for Profitability Premium and Value Premium

Speaker: Harold H. Zhang, University of Texas at Dallas

Time: Tuesday, 9 October, 10:00-11:30

Location: Room 217, Guanghua Building 2

Abstract:

The co-existence and negative correlation between profitability and value factors in the data challenge existing asset pricing models because high (low) gross profitability firms resemble growth (value) firms. We provide a unified explanation for the negatively correlated gross profitability premium and value premium in a dynamic structural model. We demonstrate that the gross profitability premium is driven by more productive firms having higher exposures to aggregate demand shocks due to the hedging effect from variable costs, whereas the value premium is created by high book-to-market firms having more assets in place relative to growth options in their asset composition and hence lower exposures to aggregate investment shocks. Empirical evidence provides strong support for our proposed explanation.

Introduction:

Dr. Harold Huibing Zhang is a Professor in Finance at Jindal School of Management, University of Texas at Dallas. He received his Ph.D. in Economics from Duke University. His research interests lie in Optimal portfolio decisions, Asset pricing, Taxation.

//jindal.utdallas.edu/som/faculty/harold-zhang

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