Biases and Lags in Book Value and Their Effects on the Ability of the Book-to-Market Ratio to Predict Book Return on Equity

Posted: 29 Nov 1999

See all articles by William H. Beaver

William H. Beaver

Stanford University

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business

Abstract

We distinguish two sources of variation in the book-to-market ratio (BTM) -- bias and lags -- with different implications for future book return on equity (ROE). We hypothesize that the bias and lag components of the BTM both have negative implications for future ROE, but the bias component's implications persist while the lag component's implications decay over the period that the firm's currently unrecognized economic gains or losses are recognized. We forecast ROE over horizons from one to five years and the terminal value in the discounted residual income valuation model at a five-year horizon, and find results generally consistent with our hypotheses. We also predict and find that the association between the bias (but not the lag) component and future ROE is less negative for higher growth firms.

JEL Classification: M41, G12

Suggested Citation

Beaver, William H. and Ryan, Stephen G., Biases and Lags in Book Value and Their Effects on the Ability of the Book-to-Market Ratio to Predict Book Return on Equity. Available at SSRN: https://ssrn.com/abstract=196708

William H. Beaver

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-4409 (Phone)
650-725-6152 (Fax)

Stephen G. Ryan (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street, Suite 10-73
New York, NY 10012-1118
United States
212-998-0020 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
4,911
PlumX Metrics