Refined Book-to-Market Ratio and the Cross-Section of Stock Returns in China

33 Pages Posted: 8 Nov 2019

See all articles by Yangyi Liu

Yangyi Liu

Southwestern University of Finance and Economics (SWUFE) - School of Finance

Chuan Shi

Beijing Liangxin Investment Management Co. Ltd.

Xiangbin Lian

Shenzhen China-Europe Rabbit Fund Management Co.,Ltd

Date Written: October 9, 2019

Abstract

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

Liu, Yangyi and Shi, Chuan and Lian, Xiangbin, Refined Book-to-Market Ratio and the Cross-Section of Stock Returns in China (October 9, 2019). Available at SSRN: https://ssrn.com/abstract=3466909 or http://dx.doi.org/10.2139/ssrn.3466909

Yangyi Liu (Contact Author)

Southwestern University of Finance and Economics (SWUFE) - School of Finance ( email )

Chengdu, 610074
China

Chuan Shi

Beijing Liangxin Investment Management Co. Ltd. ( email )

Beijing
China

HOME PAGE: http://www.liang-xin.com

Xiangbin Lian

Shenzhen China-Europe Rabbit Fund Management Co.,Ltd ( email )

Shen Zhen, China

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