Accounting Valuation, Market Expectation, and the Book-to-Market Effect

Posted: 8 Jul 1998

See all articles by Richard M. Frankel

Richard M. Frankel

Washington University in Saint Louis - Olin Business School

Charles M.C. Lee

Stanford University - Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Abstract

Accounting-based valuation theory suggests that a firm's value (V) is a combination of its book value (B) and market expectations of future earnings. We empirically evaluate the ability of this model to explain the book-to-market (B/P) effect. We find that our empirical proxies of V dominate B in cross-sectional correlations with price, and that the resulting V/P ratios also predict cross-sectional returns. In addition, we find that errors in analyst consensus forecasts are predictable, and that returns from trading on these predictable errors account for much of the B/P effect.

JEL Classification: G12, G14, M41

Suggested Citation

Frankel, Richard M. and Lee, Charles M.C., Accounting Valuation, Market Expectation, and the Book-to-Market Effect. Available at SSRN: https://ssrn.com/abstract=105768

Richard M. Frankel (Contact Author)

Washington University in Saint Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Charles M.C. Lee

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
3,925
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information