Market Reactions to Tangible and Intangible Information




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    • Daniel is at Kellogg School of Management, Northwestern University and NBER and Titman is at College of Business Administration, University of Texas, Austin and NBER. We thank Nick Barberis, George Buckley, Mike Cooper, Gene Fama, Josef Lakonishook, Mitchell Petersen, Canice Prendergast, Andrei Shleifer, Rob Stambaugh (the editor), Walter Torous, Linda Vincent, Tuomo Vuolteenaho, Wei Xiong, and an anonymous referee, and numerous seminar participants for helpful discussions, comments, and suggestions. We especially thank Kenneth French for assistance with data, and for comments and suggestions.


The book-to-market effect is often interpreted as evidence of high expected returns on stocks of “distressed” firms with poor past performance. We dispute this interpretation. We find that while a stock's future return is unrelated to the firm's past accounting-based performance, it is strongly negatively related to the “intangible” return, the component of its past return that is orthogonal to the firm's past performance. Indeed, the book-to-market ratio forecasts returns because it is a good proxy for the intangible return. Also, a composite equity issuance measure, which is related to intangible returns, independently forecasts returns.