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In this article we find that value premium exist throughout our sample period 1998-2008. However, the predictability of Book-to-Market (B/M) ratio appears to be unrelated with financial distress risk. In fact, value stocks are less risky than growth stocks in terms of return volatility and estimated financial distress risk. Further, our results suggest that the factor Value Minus Growth (VMG), which is directly related to value premium, is not a pervasive risk measure compared to the market factor and Small Minus Big (SMB) factor. While the size effect seems to be closely related to distress risk, both size and B/M factors do not appear to be driven by financial distress risk.
