Earnings Yields, Market Values, and Stock Returns





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    • Jaffe and Keim are from the Wharton School, University of Pennsylvania. Westerfield is from the School of Business Administration, University of Southern California. We thank Marshall Blume, Mark Grinblatt, Andrew Lo, Ron Masulis, Jay Ritter, Rex Sinquefield, and seminar participants at Indiana University, the University of Iowa, the University of Oklahoma, Vanderbilt University, and the 1987 Western Finance Association Meetings for helpful comments, and Hiang-Lin Gn for excellent research assistance. Financial support was provided by the Research Foundation of the Institute of Chartered Financial Analysts and the Geewax-Terker Research Program in Financial Instruments.


Earlier evidence concerning the relation between stock returns and the effects of size and earnings to price ratio (E/P) is not clear-cut. This paper re-examines these two effects with (a) a substantially longer sample period, 1951–1986, (b) data that are reasonably free of survivor biases, (c) both portfolio and seemingly unrelated regression tests, and (d) an emphasis on the important differences between January and other months. Over the entire period, the earnings yield effect is significant in both January and the other eleven months. Conversely, the size effect is significantly negative only in January. We also find evidence of consistently high returns for firms of all sizes with negative earnings.