Divergence of Book Value from Actual Value?

Why do recent studies find that the value premium declines over time? In their April 2020 paper entitled “The Fundamental-to-Market Ratio and the Value Premium Decline”, Andrei Gonçalves and Gregory Leonard investigate whether book value (book equity, BE) is a good proxy for actual fundamental value (fundamental equity, FE). They measure FE for each firm at the end of June from accounting data as of the end of the prior calendar year as autoregression-estimated cash flow (payouts, including share buybacks) with a uniform discount rate across firms. They then sort stocks into tenths (deciles) based on BE-to-Market Equity ratio (BE/ME) or FE-to-Market Equity ratio (FE/ME) based on end-of-June stock prices. Finally, they annually reform capitalization-weighted portfolios that are long (short) the deciles with the highest (lowest) ratios to compare BE-based and FE-based value premiums. Using BE and FE inputs, market capitalizations and prices for all U.S.-listed common stocks except utilities and financials during July 1973 through June 2019, they find that:

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