Rationalizing the Value Premium under Economic Fundamentals in an Emerging Market

This paper studies the value anomaly in the context of Malaysia, an emerging economy with a top heavy, closely held, and state-owned institutional setting. We attribute the anomaly to the investment pattern of growth firms. Our empirical analysis illustrates that growth firms have a tendency to hoard cash, delaying the undertaking of their growth options, especially in poor economic environments. This mitigates their business risk, but lowers their market valuation, driving down their returns. Our hypothesis has the advantage of reconciling the diverging views on the causes of the value premium stemming from the neoclassical and behavioural perspectives.