Size and Book to Market Factors in Earnings and Returns
Eugene F. Fama
University of Chicago - Finance
Kenneth R. French
Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)
JOURNAL OF FINANCE, Vol 50, No 1, March 1995
We study whether the behavior of stock prices, in relation to size and book to market equity (BE/ME), reflects the behavior of earnings. Consistent with rational pricing, high BE/ME signals persistent poor earnings and low BE/ME signals strong earnings. Moreover, stock prices forecast the reversion of earnings growth observed after firms are ranked on size and BE/ME. Finally, there are market, size, and BE/ME factors in earnings like those in returns. The market and size factors in earnings help explain those in returns, but we find no link between BE/ME factors in earnings and returns.
JEL Classification: G12, G3
Date posted: May 10, 2000
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