52 Pages Posted: 17 Mar 2010 Last revised: 5 Dec 2010
Date Written: December 2, 2010
We show that characteristics of stock issuers can be used to forecast important common factors in stocks returns such as those associated with book-to-market, size, and industry. Specifically, we use differences between the attributes of stock issuers and repurchasers to forecast characteristic-related factor returns. For example, we show that large firms underperform following years when issuing firms are large relative to repurchasing firms. While our strongest results are for portfolios based on book-to-market, size (i.e., we forecast the HML and SMB factors), and industry, our approach is also useful for forecasting factor returns associated with distress, payout policy, and profitability.
Keywords: Limits-to-arbitrage, characteristics, mispricing, capital structure, cross-section of stock returns
JEL Classification: G14, G32
Suggested Citation: Suggested Citation