Date of Award
Winter 12-17-2025
Document Type
Honors Thesis
Department/Major
Accountancy
Additional Department
Finance
First Advisor
Adrian Tippit
Second Advisor
Nicholas Wilson
Third Advisor
Marek Kolinski
Keywords
Interaction, Regression, Cross-Sectional, Valuation Ratio, Financial Ratio, Stock Market, Value Premium, Finance, Accounting, Economics
Subject Categories
Accounting | Business | Business Analytics | Corporate Finance | Econometrics | Economics | Finance | Finance and Financial Management
Abstract
This thesis examines why value-based investment strategies generate strong returns in some environments yet weaken or collapse in others. Regressions test whether the performance of the book-to-market ratio depends on the investor’s perception of financial health as defined by F-Score and accruals. Across additive regressions, interaction models, cross-sectionals, and heatmap visualizations, a consistent mechanism emerges. The book-to-market effect is strongest when financial information is neither highly reliable nor severely distressed. In these “moderate-quality” environments, investors struggle to fully distinguish the transitory components of earnings from their persistent counterparts. This makes valuation ratios particularly influential. Accrual intensity and financial strength jointly moderate this relationship. Accruals amplify value returns when fundamentals are ambiguous but lose predictive power at the extremes of the financial health spectrum. F-Score plays a similar conditioning role, strengthening or weakening the value signal depending on the clarity of underlying accounting performance. Subperiod analyses show that the 2008 financial crisis reshaped these conditional relationships. After the crisis, interaction effects are consistent with structural changes in investor behavior, regulatory oversight, and the informativeness of reported numbers. Fama-MacBeth cross-sectionals further reveal that value and accrual signals matter most when the informational environment is informative enough to be processed, yet uncertain enough for misinterpretation to persist. The results show that valuation ratios and perceiving financial health are not independent anomalies but jointly determine the environments in which value-based strategies succeed. Understanding the dynamics of perceived financial health is therefore essential for understanding when and why value premia emerge, fade, or reverse.
Recommended Citation
Klein, Samuel L., "The Conditional Nature of the Value Premium: Interaction and Cross-Sectional Evidence Across Market Regimes" (2025). Honors Thesis. 402.
https://red.library.usd.edu/honors-thesis/402
Included in
Accounting Commons, Business Analytics Commons, Corporate Finance Commons, Econometrics Commons, Finance Commons, Finance and Financial Management Commons