What drives the value premium? The role of asset risk and leverage

Jaewon Choi

Research output: Contribution to journalArticlepeer-review

56 Citations (Scopus)


This paper shows empirically how asset risk and financial leverage interact to explain the equity risk dynamics of value versus growth stocks. During economic downturns, the asset betas and leverage of value firms increase, contributing to a sharp rise in equity betas. Asset betas of growth firms are much less sensitive to economic conditions, and, consistent with the tradeoff theory of capital structure, growth firms are also less levered, contributing to the relative stability of their equity betas. By incorporating instruments that better capture beta dynamics, I show that the interactions of conditional betas with the market risk premium and volatility explain approximately 40% of the unconditional value premium.

Original languageEnglish
Pages (from-to)2845-2875
Number of pages31
JournalReview of Financial Studies
Issue number11
Publication statusPublished - 2013 Nov

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics


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