Hostname: page-component-848d4c4894-8kt4b Total loading time: 0 Render date: 2024-07-06T00:19:32.477Z Has data issue: false hasContentIssue false
  • English
  • Français

A Reexamination of Firm Size, Book-to-Market, and Earnings Price in the Cross-Section of Expected Stock Returns

Published online by Cambridge University Press:  06 April 2009

Dongcheol Kim
Dongcheol Kim
Affiliation:
Department of Finance and Economics, Faculty of Management, Janice Levin Building, Rutgers University, New Brunswick, NJ 08903.
Get access Rights & Permissions [Opens in a new window]

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 COMPUSTAT and the errors-in-variables (EIV) bias. After filling in the missing data on COMPUSTAT with the 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. However, book-to-market equity still has significant explanatory power for average stock returns, even though the EIV bias is corrected.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 32 , Issue 4 , December 1997 , pp. 463 - 489
Copyright
Copyright © School of Business Administration, University of Washington 1997

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Banz, R. W. “The Relationship between Return and Market Value of Common Stocks.” Journal of Financial Economics, 9 (1981), 3–18.CrossRefGoogle Scholar
Barone-Adesi, G., and Talwar, P. P.. “Market Models and Heteroscedasticity of Residual Security Returns.” Journal of Business and Economics, 1 (1983), 163–168.Google Scholar
Basu, S. “Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis.” Journal of Finance, 32 (1977), 663–682.Google Scholar
Basu, S. “The Relationship between Earnings Yield, Market Value, and Return for NYSE Common Stocks: Further Evidence.” Journal of Financial Economics, 12 (1983), 129–156.CrossRefGoogle Scholar
Belkaoui, A. “Canadian Evidence of Heteroscedasticity in the Market Model.” Journal of Finance, 32 (1977), 1320–1324.CrossRefGoogle Scholar
Berk, J. B. “A Critique of Size-Related Anomalies.” Review of Financial Studies, 8 (1995), 275–286.CrossRefGoogle Scholar
Bey, R. P., and Pinches, G. E.. “Additional Evidence of Heteroscedasticity in the Market Model.” Journal of Financial and Quantitative Analysis, 15 (1980), 299–322.CrossRefGoogle Scholar
Black, F. “Capital Market Equilibrium with Restricted Borrowing.” Journal of Business, 45 (1972), 444–455.CrossRefGoogle Scholar
Black, F.; Jensen, M. C.; and Scholes, M.. “The Capital Asset Pricing Model: Some Empirical Tests.” In Studies in the Theory of Capital Markets, Jensen, Michael, ed. New York, NY: Praeger (1972).Google Scholar
Blume, M., and Stambaugh, R. F.. “Biases in Computed Returns: An Application to the Size Effect.” Journal of Financial Economics, 12 (1983), 387–404.CrossRefGoogle Scholar
Breen, W. J., and Korajczyk, R.. “On Selection Biases in Book-to-Market Based Tests of Asset Pricing Models.” Working Paper, Northwestern Univ. (1994).Google Scholar
Brown, S. J. “Heteroscedasticity in the Market Model: A Comment.” Journal of Business, 50 (1977), 80–83.CrossRefGoogle Scholar
Chan, K. C.; Chen, N.; and Hsieh, D. A.. “An Explanatory Investigation of the Firm Size Effect.” Journal of Financial Economics, 14 (1985), 451–471.CrossRefGoogle Scholar
Chan, L. K. C.; Hamao, Y.; and Lakonishok, J.. “Fundamentals and Stock Returns in Japan.” Journal of Finance, 46 (1991), 1739–1789.CrossRefGoogle Scholar
Chan, L. K. C.; Jegadeesh, N.; and Lakonishok, J.. “Evaluating the Performance of Value versus Glamour Stocks: The Impact of Selection Bias.” Journal of Financial Economics, 38 (1995), 269–296.CrossRefGoogle Scholar
Davis, J. L. “The Cross-Section of Realized Stock Returns: The Pre-COMPUSTAT Evidence.” Journal of Finance, 49 (1994), 1579–1593.Google Scholar
Fama, E. F., and French, K. R.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427–465.Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Bonds and Stocks.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Multifactor Explanations of Asset Pricing Anomalies.” Journal of Finance, 51 (1996), 55–84.CrossRefGoogle Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.CrossRefGoogle Scholar
Gibbons, M. R. “Multivariate Tests of Financial Models.” Journal of Financial Economics, 10(1982), 3–27.CrossRefGoogle Scholar
Handa, P.; Kothari, S. P.; and Wasley, C.. “The Relation between the Return Interval and Betas—Implications for the Size Effects.” Journal of Financial Economics, 23 (1989), 79–100.CrossRefGoogle Scholar
Handa, P.; Kothari, S. P.; and Wasley, C.. “Sensitivity of Multivariate Tests of the Capital Asset Pricing Model to the Return Measurement Interval.” Journal of Finance, 48 (1993), 1543–1551.Google Scholar
Ibbotson, R. C.Stocks, Bonds, Bills, and Inflation: 1993 Yearbook. Chicago, IL: R.G. Ibbotson Associates (1994).Google Scholar
Jegadeesh, N. “Does Market Risk Really Explain the Size Effect?” Journal of Financial and Quantitative Analysis, 27 (1992), 337–351.CrossRefGoogle Scholar
Keim, D. B. “Size-Related Anomalies and Stock Return Seasonally.” Journal of Financial Economics, 12 (1983), 13–32.CrossRefGoogle Scholar
Kim, D. “The Errors-in-Variables Problem in the Cross-Section of Expected Stock Returns.” Journal of Finance, 50 (1995), 1605–1634.Google Scholar
Kothari, S. P., and Shanken, J.. “Book-To-Market, Dividend Yield, and Expected Market Returns: A Time-Series Analysis.” Working Paper Univ. of Rochester (1995).Google Scholar
Kothari, S. P.; Shanken, J.; and Sloan, R. G.. “Another Look at the Cross-Section of Expected Stock Returns.” Journal of Finance, 50 (1995), 185–224.Google Scholar
Levhari, D., and Levy, H.. “The Capital Asset Pricing Model and the Investment Horizon.” Review of Economics and Statistics, 59 (1977), 92–104.CrossRefGoogle Scholar
Lintner, J. “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets.” Review of Economics and Statistics, 47 (1965), 13–37.CrossRefGoogle Scholar
Litzenberger, R. H., and Ramaswamy, K.. “The Effect of Personal Taxes and Dividends on Capital Asset Prices: Theory and Empirical Evidence.” Journal of Financial Economics, 7 (1979), 163–196.CrossRefGoogle Scholar
Lo, A. W., and MacKinlay, A. C.. “Data-Snooping Biases in Tests of Financial Asset Pricing Models.” Review of Financial Studies, 3 (1990), 431–467.CrossRefGoogle Scholar
McElroy, M. B., and Burmeister, E.. “Arbitrage Pricing Theory as a Restricted Nonlinear Multivariate Regression Model.” Journal of Business and Economic Statistics, 6 (1988), 29–42.Google Scholar
Miller, M. H., and Scholes, M.. “Rates of Return in Relation to Risk: A Re-Examination of Some Recent Findings.” In Studies in the Theory of Capital Markets, Jensen, Michael, ed. New York, NY: Praeger (1972).Google Scholar
Reinganum, M. R. “Misspecification of Capital Asset Pricing: Empirical Anomalies Based on Earning Yield and Market Value.” Journal of Financial Economics, 9 (1981), 19–46.CrossRefGoogle Scholar
Roll, R. “On Computing Mean Returns and the Small Firm Premium.” Journal of Financial Economics, 12 (1983), 371–386.CrossRefGoogle Scholar
Rosenberg, B.; Reid, K.; and Lanstein, R.. “Persuasive Evidence of Market Inefficiency.” Journal of Portfolio Management, 11 (1985), 9–17.CrossRefGoogle Scholar
Shanken, J. “On the Estimation of Beta-Pricing Models.” Review of Financial Studies, 5 (1992), 1–33.CrossRefGoogle Scholar
Sharpe, W. F. “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk.” Journal of Finance, 19 (1964), 425–442.Google Scholar