Size and Book-to-Market Factors in Earnings and Returns

Authors

  • EUGENE F. FAMA,

  • KENNETH R. FRENCH

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    • Graduate School of Business, University of Chicago, 1101 East 58th St., Chicago, IL 60637, and Yale School of Management, Box 208200, New Haven, CT 06520. The comments of David Booth, Josef Lakonishok, Stephen Penman, Rex Sinquefield, René Stulz, and two referees are gratefully acknowledged. This research is supported by the National Science Foundation (Fama) and the Center for Research in Securities Prices (French).

ABSTRACT

We study whether the behavior of stock prices, in relation to size and book-to-market-equity (BE/ME), reflects the behavior of earnings. Consistent with rational pricing, high BE/ME signals persistent poor earnings and low BE/ME signals strong earnings. Moreover, stock prices forecast the reversion of earnings growth observed after firms are ranked on size and BE/ME. Finally, there are market, size, and BE/ME factors in earnings like those in returns. The market and size factors in earnings help explain those in returns, but we find no link between BE/ME factors in earnings and returns.

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