Abstract

http://ssrn.com/abstract=1966566
 
 

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An Accounting-Based Characteristic Model for Asset Pricing


Stephen H. Penman


Columbia University - Department of Accounting

Francesco Reggiani


Bocconi University - Department of Accounting

Scott A. Richardson


London Business School; AQR Capital Management, LLC

A. Irem Tuna


London Business School

September, 2013


Abstract:     
The paper presents an accounting framework for identifying characteristics that indicate expected returns. The framework links expected returns to expected earnings and earnings growth, so a characteristic indicates expected returns if it indicates expected earnings and earnings growth that the market prices as being at risk. The framework validates book-to-price (B/P) as a valid characteristic in asset pricing: B/P is associated with higher expected earnings growth and also captures the risk of that growth not being realized. However, the framework also points to the forward earning-to-price (E/P) as a risk characteristic. E/P is the only relevant characteristic when there is no expected earnings growth, but the weight shifts to B/P with growth. As a validation of our model, we revisit the puzzling negative relation that has been observed between leverage and realized returns. This has been attributed to failure to control for operating risk while examining the effect of leverage. We find a positive relation between leverage and returns when risk characteristics identified by our model are controlled for.

Number of Pages in PDF File: 53

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Date posted: November 30, 2011 ; Last revised: September 23, 2013

Suggested Citation

Penman, Stephen H. and Reggiani, Francesco and Richardson, Scott A. and Tuna, A. Irem, An Accounting-Based Characteristic Model for Asset Pricing (September, 2013). Available at SSRN: http://ssrn.com/abstract=1966566 or http://dx.doi.org/10.2139/ssrn.1966566

Contact Information

Stephen H. Penman (Contact Author)
Columbia University - Department of Accounting ( email )
3022 Broadway
New York, NY 10027
United States
212-854-9151 (Phone)
212-316-9219 (Fax)

Francesco Reggiani
Bocconi University - Department of Accounting ( email )
Via Roentgen 1
Milan, 20136
Italy
Scott Anthony Richardson
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
AQR Capital Management, LLC ( email )
Greenwich, CT
United States
Ayse Irem Tuna
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
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