The Relationship between the Value Effect and Industry Affiliation

We examine industry affiliation and the relationship between stock returns and book-to-market equity (the value effect). The robustness of the value effect is supported as a significant value premium is shown to exist in 15 of 21 industries. Both industry- and firm-level value effects are identified; however, the firm-level effect is the more prominent of the two. Further, the value effect is shown to be strongest in value industries and weakest in growth industries. Finally, we show evidence consistent with the claim that the value premium is due to investors requiring higher returns from firms in distressed conditions.