Profitability, Growth, and Average Returns
Eugene F. Fama
University of Chicago - Booth School of Business (Finance Authors)
Kenneth R. French
Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)
CRSP Working Paper No. 558
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.
Number of Pages in PDF File: 41working papers series
Date posted: July 30, 2004
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