A Framework for Identifying Accounting Characteristics for Asset Pricing Models, with an Evaluation of Book‐To‐Price

33 Pages Posted: 17 Sep 2018

See all articles by Stephen H. Penman

Stephen H. Penman

Columbia Business School - Department of Accounting

Francesco Reggiani

University of Zurich

Scott A. Richardson

AQR Capital Management, LLC; London Business School

A. Irem Tuna

London Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 2018

Abstract

We provide a framework for identifying accounting numbers that indicate risk and expected return. Under specified accounting conditions for measuring earnings and book value, book‐to‐price (B/P) indicates expected returns, providing justification for B/P in asset pricing models. However, the framework also points to earnings‐to‐price (E/P) as a risk characteristic. Indeed, E/P, rather than B/P, is the relevant characteristic when there is no expected earnings growth, but the weight shifts to B/P with growth. Using this framework we resolve a puzzle: in contrast to previous empirical research, we find that leverage is positively associated with future returns, as predicted by theory.

Keywords: accounting principles, book‐to‐price, earnings‐to‐price, growth and risk

Suggested Citation

Penman, Stephen H. and Reggiani, Francesco and Richardson, Scott Anthony and Tuna, Ayse Irem, A Framework for Identifying Accounting Characteristics for Asset Pricing Models, with an Evaluation of Book‐To‐Price (September 2018). European Financial Management, Vol. 24, Issue 4, pp. 488-520, 2018. Available at SSRN: https://ssrn.com/abstract=3248610 or http://dx.doi.org/10.1111/eufm.12171

Stephen H. Penman (Contact Author)

Columbia Business School - Department of Accounting ( email )

3022 Broadway
New York, NY 10027
United States
212-854-9151 (Phone)
212-316-9219 (Fax)

Francesco Reggiani

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Scott Anthony Richardson

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Ayse Irem Tuna

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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