Abstract

http://ssrn.com/abstract=1966566
 
 

References (56)



 


 



An Accounting-Based Characteristic Model for Asset Pricing


Stephen H. Penman


Columbia Business School - 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

May 2015


Abstract:     
The paper presents an accounting framework for identifying characteristics that indicate expected returns. A model 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. In applying the framework, the paper confirms 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. Indeed, E/P, rather than B/P, is the relevant characteristic when there is no expected earnings growth, but the weight shifts to B/P with growth. The framework also enables the separation of the expected return for operating risk from that due to financing risk. With this separation, the paper revisits the puzzling negative relation that has been observed between leverage and realized returns, a finding that has been attributed to failure to control for operating risk. We find a positive relation between leverage and returns when operating risk characteristics identified by our model are recognized.

Number of Pages in PDF File: 63


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Date posted: November 30, 2011 ; Last revised: June 13, 2015

Suggested Citation

Penman, Stephen H. and Reggiani, Francesco and Richardson, Scott A. and Tuna, A. Irem, An Accounting-Based Characteristic Model for Asset Pricing (May 2015). 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 Business School - 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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