In a recent interview, Michael A. Crain (The Financial Valuation Group) says he sees a gap between the financial research being published by the academic community and what BV professionals know about. One of the reasons is that there’s little incentive for academics to translate this complicated research for practitioners, “who find it extremely difficult to understand,” says Crain.
Example: Crain says a good example of this hidden research is in a working paper from Fama and French on their five-factor model. “This is one recent line of research that hasn’t received much attention in the BV community,” he says. Of course, the duo is famous for its three-factor model. Their new research “shows that the degree of a firm’s profitability and reinvestment are two additional factors that have an effect on equity returns,” says Crain. “The implication is that these two factors have a role in explaining cost of capital.”
During the interview, Crain also shows how data about the size premium contradict conventional wisdom. The interview will appear in the February issue of Business Valuation Update.
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