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Profitability, Growth, and Average Returns
Eugene F. Fama University of Chicago - Booth School of Business Kenneth R. French Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER) July 2004 CRSP Working Paper No. 558 Abstract: Valuation theory says that expected stock returns are related to three variables: the book-to-market equity ratio (B/M), expected profitability, and expected investment. Given B/M and expected profitability, higher rates of investment imply lower expected returns. But controlling for the other two variables, more profitable firms have higher expected returns, as do firms with higher B/M. These predictions are confirmed in our tests. Our results are qualitatively similar to earlier evidence, but in quantitative (economic) terms, there are some interesting surprises. Working Paper Series Date posted: July 30, 2004 ; Last revised: June 15, 2005Suggested CitationContact Information
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