Average Returns, B/M, and Share Issues

36 Pages Posted: 20 May 2007 Last revised: 22 Oct 2007

See all articles by Eugene F. Fama

Eugene F. Fama

University of Chicago - Finance

Kenneth R. French

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Date Written: May 2007

Abstract

The book-to-market ratio, B/M, is a noisy measure of expected stock returns because B/M also varies with expected cashflows. Our hypothesis is that the evolution of B/M, in terms of past changes in book equity and price, contains independent information about expected cashflows that can be used to improve estimates of expected returns. The tests support this hypothesis, with results that are largely but not entirely similar for Microcap stocks (below the 20th NYSE market capitalization percentile) and All but Micro stocks.

Keywords: Average Returns, B/M, and Share Issues

JEL Classification: G12

Suggested Citation

Fama, Eugene F. and French, Kenneth R., Average Returns, B/M, and Share Issues (May 2007). CRSP Working Paper No. 619, Available at SSRN: https://ssrn.com/abstract=945546 or http://dx.doi.org/10.2139/ssrn.945546

Eugene F. Fama (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7282 (Phone)
773-702-9937 (Fax)

Kenneth R. French

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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