Market Reactions to Tangible and Intangible Information Revisited
University of Chicago - Booth School of Business
Juhani T. Linnainmaa
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
January 1, 2014
Chicago Booth Research Paper No. 13-82
Daniel and Titman (2006) propose that the value premium is due to investors overreacting to intangible information. They therefore decompose changes in firms’ book-to-market ratios into stock returns and a proxy for tangible information based on accounting performance ("book returns"). Consistent with investors overreacting to intangible information, they find that only stock returns unrelated to book returns reverse. We show that their decomposition creates a book return polluted by past book-to-market ratios, stock returns, net issuances, and dividends. One-third of the variation in book returns is due to these factors. The Daniel and Titman (2006) result is fragile — a plausible alternative definition of tangible information reverses their conclusions.
Number of Pages in PDF File: 41working papers series
Date posted: November 24, 2013 ; Last revised: January 21, 2014
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