Are Firms in 'Boring' Industries Worth Less?

Fisher College of Business Working Paper No. 2015-3-02

Charles A. Dice Center Working Paper No. 2015-02

47 Pages Posted: 16 Jan 2015 Last revised: 17 Jan 2015

See all articles by Jia Chen

Jia Chen

Peking University - Guanghua School of Management

Kewei Hou

Ohio State University (OSU) - Department of Finance

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: January 13, 2015

Abstract

Using theories from the behavioral finance literature to predict that investors are attracted to industries with more salient outcomes and that therefore firms in such industries have higher valuations, we find that firms in industries that have high industry-level dispersion of profitability have on average higher market-to-book ratios than firms in low dispersion industries. This positive relation between market-to-book ratios and industry profitability dispersion is economically large and statistically significant and is robust to controlling for variables used to explain firm-level valuation ratios in the literature. Consistent with the mispricing explanation of this finding, we show that firms in less boring industries have a lower implied cost of equity and lower realized returns. We explore alternative explanations for our finding, but find that these alternative explanations cannot explain our results.

Keywords: Market-to-book ratio, misevaluation, saliency, industry, cost of equity, profitability dispersion

JEL Classification: G12, G14, G31, G32

Suggested Citation

Chen, Jia and Hou, Kewei and Stulz, Rene M., Are Firms in 'Boring' Industries Worth Less? (January 13, 2015). Fisher College of Business Working Paper No. 2015-3-02. Available at SSRN: https://ssrn.com/abstract=2549268 or http://dx.doi.org/10.2139/ssrn.2549268

Jia Chen

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Kewei Hou

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-0552 (Phone)
614-292-2418 (Fax)

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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