Book-to-Market Ratio and Skewness of Stock Returns

28 Pages Posted: 5 Jan 2011 Last revised: 2 Jul 2015

See all articles by Xiao-Jun Zhang

Xiao-Jun Zhang

University of California, Berkeley; China Academy of Financial Research (CAFR)

Date Written: December 25, 2010

Abstract

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

Zhang, Xiao-Jun, Book-to-Market Ratio and Skewness of Stock Returns (December 25, 2010). Accounting Review, Vol. 88, No. 6, 2013, Available at SSRN: https://ssrn.com/abstract=1734511 or http://dx.doi.org/10.2139/ssrn.1734511

Xiao-Jun Zhang (Contact Author)

University of California, Berkeley ( email )

545 Student Services Building
SPC 1900
Berkeley, CA 94720
United States
(510) 642-4789 (Phone)
(510) 642-4700 (Fax)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
630
Abstract Views
4,169
rank
46,643
PlumX Metrics