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.

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