Earnings Quality and Book-to-Market in the Cross Section of Expected Returns

44 Pages Posted: 21 Oct 2019

See all articles by Vasiliki E. Athanasakou

Vasiliki E. Athanasakou

Saint Mary's University, Canada - Sobey School of Business

George Athanassakos

University of Western Ontario - Finance-Economics Area Group

Date Written: October 10, 2019

Abstract

The purpose of this paper is to examine whether earnings quality contributes to the book-to- market’s predictive power in the cross section of stock returns. Earnings quality is embedded in the value-growth effect given that retained earnings is a key part of the book value of equity. Earnings quality reflects the effects of managerial discretion on reported earnings, which has been shown to be associated with both risk and behavioral biases in asset pricing. Our results affirm the existence of a value premium and show that the value premium is more pronounced within poor earnings quality stocks. Moreover, we find that poor earnings quality contributes to the value premium mainly through the pricing of growth stocks. Our results suggest that the quality of reported earnings has an incremental role in shaping expected returns of value versus growth stocks.

Keywords: value premium, earnings quality, earnings management, asset pricing

JEL Classification: G12, M41

Suggested Citation

Athanasakou, Vasiliki E. and Athanassakos, George, Earnings Quality and Book-to-Market in the Cross Section of Expected Returns (October 10, 2019). Available at SSRN: https://ssrn.com/abstract=3467747 or http://dx.doi.org/10.2139/ssrn.3467747

Vasiliki E. Athanasakou (Contact Author)

Saint Mary's University, Canada - Sobey School of Business ( email )

Sobey Building 311
923 Robie Street
Halifax, Nova Scotia B3H 3C3
Canada

George Athanassakos

University of Western Ontario - Finance-Economics Area Group ( email )

London, Ontario N6A 5B8
Canada

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