Book-to-Market Ratio and Skewness of Stock Returns
28 Pages Posted: 5 Jan 2011 Last revised: 2 Jul 2015
Date Written: December 25, 2010
This study demonstrates that stocks with low book-to-market ratios, also known as glamour stocks, have significantly more positive skewness in their return distributions compared to the return distributions of value stocks with high book-tomarket ratios. The premium (discount) investors apply to these glamour (value) stocks also correlates significantly with the difference in return skewness. These findings suggest that the value/glamour-stock puzzle is partially explained by investor preference for positive skewness in stock returns. Such preference for skewness, which is consistent with investors having inverse S-shaped utility functions, is observed in such consumer behaviors as lottery purchases and gambling. This paper further documents significant predictive power of accounting-based measures, such as the book rate of return, with respect to the skewness of stock returns.
Keywords: Accounting conservatism, Value/glamour stocks, Book-to-market ratio, Skewness, Growth, Capital asset pricing
JEL Classification: G11, G12, M41
Suggested Citation: Suggested Citation