Resurrecting the Value Factor from its Redundancy

The value factor lacks incremental pricing power in the Fama-French five-factor model, being subsumed by the investment factor. The factors' relationship arises because book-to-market and investment both capture information about expected returns and cash flows. Using only stocks whose book-to-market and investment primarily reflect expected return information to construct the factors increases their means and Sharpe ratios by more than 50%. Importantly, the adjusted factors capture not only more but also complementary pricing information and improve the five-factor model's pricing power. Thus, a value factor built from stocks for which book-to-market is a good expected return indicator is not redundant.