Abstract

http://ssrn.com/abstract=2358513
 


 



Market Reactions to Tangible and Intangible Information Revisited


Joseph Gerakos


University of Chicago - Booth School of Business

Juhani T. Linnainmaa


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

July 1, 2014

Chicago Booth Research Paper No. 13-82
Fama-Miller Working Paper

Abstract:     
Daniel and Titman (2006) propose that the value premium is due to investors overreacting to in- tangible information. They therefore decompose five-year changes in firms' book-to-market ratios into stock returns and a residual that is a proxy for tangible information based on accounting performance ("book returns"). Consistent with investors overreacting to intangible information, they find that only stock returns orthogonal 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. Empirically, two-fifths of the variation in book returns is due to these factors. In addition, the Daniel and Titman (2006) result is sensitive to methodological choices. When we use the change in the book value of equity as a proxy for tangible information, only the tangible component of stock returns reverses. Moreover, current book-to-market subsumes the intangible return's power to predict the cross-section of average returns, which casts doubt on the argument that book-to-market forecasts returns because it is a good proxy for the intangible return.

Number of Pages in PDF File: 29

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Date posted: November 24, 2013 ; Last revised: August 30, 2014

Suggested Citation

Gerakos, Joseph and Linnainmaa, Juhani T., Market Reactions to Tangible and Intangible Information Revisited (July 1, 2014). Chicago Booth Research Paper No. 13-82; Fama-Miller Working Paper. Available at SSRN: http://ssrn.com/abstract=2358513 or http://dx.doi.org/10.2139/ssrn.2358513

Contact Information

Joseph J. Gerakos (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Ave.
Chicago, IL 60637
United States
773-834-6882 (Phone)
Juhani T. Linnainmaa
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
(773) 834-3176 (Phone)
(773) 753-1052 (Fax)
HOME PAGE: http://faculty.chicagobooth.edu/juhani.linnainmaa
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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