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Average Returns, B/M, and Share Issues

Authors

  • EUGENE F. FAMA,

  • KENNETH R. FRENCH

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    • Fama is from the Graduate School of Business, University of Chicago, and French is from Amos Tuck School of Business, Dartmouth College. The comments of seminar participants at MIT, Indiana University, the University of Utah, and New York University, Campbell Harvey, and the referees are gratefully acknowledged.

ABSTRACT

The book-to-market ratio (B/M) is a noisy measure of expected stock returns because it also varies with expected cashflows. Our hypothesis is that the evolution of B/M, in terms of past changes in book equity and price, contains independent information about expected cashflows that can be used to improve estimates of expected returns. The tests support this hypothesis, with results that are largely but not entirely similar for Microcap stocks (below the 20th NYSE market capitalization percentile) and All but Micro stocks (ABM).

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