X-Message-Number: 9748 Date: Wed, 20 May 1998 21:24:37 -0700 (PDT) From: Doug Skrecky <> Subject: stock returns Journal of Financial and Quantitative Analysis 32(4): 463-489 December 1997 "A Reexamination of Firm Size, Book-to-Market, and Earnings Price in the Cross-Section of Expected Stock Returns" Abstract: This paper reexamines the explanatory power of beta, firm size, book-to-market equity, and the earnings-price ratio for average stock returns, correcting two currently controversial biases: selection bias in the COMPUSTAT and errors-in-variables (EIV) bias. After filling in the missing data on COMPUSTAT with Moody's sample, I do not find any significantly different results for book-to-market equity from using the COMPUSTAT sample only. After correcting for the EIV bias, I find stronger support for the beta pricing theory than previous studies. Regardless of the presence of firm size, book-to-market equity, and earnings-price ratios, betas have significant explanatory power for average stock returns. In particular, firm size is barely significant using monthly returns, but no longer significant using quarterly returns, even though the EIV bias is corrected. Additional note by poster (english translation): The above abstract reveals the driving forces behind common stock appreciation, as it is currently understood by economists, who examine stock market inefficiencies. Stocks that are more volatile in price (or riskier), as measured by beta have a higher long term return. Stocks that sell for a discount to their book value also have a higher return, which has not been (thus far) directly associated with any increased risk. After beta and book value are taken into consideration, neither firm size nor earnings ratios have any effect on returns. Rate This Message: http://www.cryonet.org/cgi-bin/rate.cgi?msg=9748