Refined Book-to-Market Ratio and the Cross-Section of Stock Returns in China
33 Pages Posted: 8 Nov 2019
Date Written: October 9, 2019
Motivated by the necessity of including BM rather than replacing it by EP in the valuation of a firm, we survey 7 refinements of BM measures, and test their performance in China. BM augmented with R&D and SG&A expense contains more information about the cross-section of stock returns than the regular one. BM remains significant, after controlling for EP and other common risk factors, hence is indispensable for valuing firms, while EP becomes insignificant once BM, ROE and other variables are considered. These findings favor incorporating both BM and ROE as two separate pricing factors to using EP only.
Keywords: asset pricing; cross-section of stock returns; Book-to-Market; Earnings-to-Price; China
JEL Classification: G12, G14, G15
Suggested Citation: Suggested Citation