Another Look at the Cross-section of Expected Stock Returns


  • S. P. KOTHARI,



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    • Kothari and Shanken are from the William E. Simon Graduate School of Business Administration, University of Rochester. Sloan is from the Wharton School, University of Pennsylvania. We acknowledge the excellent research assistance of Roger Edelen and Sharmila Hardi. Barr Rosenberg has been particularly helpful on Compustat-related issues in the paper. We thank Ray Ball, Sudipta Basu, Jonathan Berk, Eugene Fama, Kenneth French, Narsimhan Jegadeesh, Jeff Pontiff, Rick Ruback, René Stulz, Dennis Sheehan, two anonymous referees, Dave Mayers (the editor), and seminar participants at the City University Business School at London, Harvard University, the Institute of Quantitative Investment Research Conference in Cambridge, London Business School, Pennsylvania State University, the National Bureau of Economic Research, Southern Methodist University, University of Southern California, SUNY at Buffalo, Wharton, and the Accounting and Economics Conference at Washington University, for useful comments. S. P. Kothari and Jay Shanken acknowledge financial support from the Bradley Policy Center at the Simon School, University of Rochester and the John M. Olin Foundation.


Our examination of the cross-section of expected returns reveals economically and statistically significant compensation (about 6 to 9 percent per annum) for beta risk when betas are estimated from time-series regressions of annual portfolio returns on the annual return on the equally weighted market index. The relation between book-to-market equity and returns is weaker and less consistent than that in Fama and French (1992). We conjecture that past book-to-market results using COMPUS-TAT data are affected by a selection bias and provide indirect evidence.