Industry-adjusted book-to-market ratio and value premium

Given the finding that the recent decline in value premium is driven by structural disparities in the ratio of book-to-market value of equity (BE/ME) across industries, we propose re-evaluating the value premium based on the book value share-to-market value share ratio (BS/MS) within each industry. Using the Fama-MacBeth regression and portfolio analyses, we show that the industry-adjusted value premium based on the BS/MS criterion remains significant even in recent decades. BS/MS long-short portfolios deliver stronger alphas than conventional BE/ME strategies, which are robust to controlling for size, liquidity, turnover, idiosyncratic risk and the intangible-adjusted book-to-market ratio.