Going by the Book: Valuation Ratios and Stock Returns

50 Pages Posted: 28 May 2021

See all articles by Ki-Soon Choi

Ki-Soon Choi

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Charles C. Y. Wang

Harvard Business School (HBS)

Date Written: August 26, 2021

Abstract

We study the use of book-to-market ratios (B/M) in value investing and its implications for comovements in firms' stock returns and trading volumes. We show B/M has increasingly detached from alternative valuation ratios while becoming worse at forecasting returns and growth in an absolute and relative sense. Despite these trends, major U.S. stock indexes and institutional funds continue relying on B/M when identifying value stocks. Consistent with this reliance shaping market outcomes, we find firms' stock returns and trading volumes comove with B/M-peers (i.e., firms with similar B/M) in excess of their fundamentals, particularly among stocks held by value-oriented funds.

Keywords: Valuation; Market-to-book ratio; Value investing; Excess comovement

JEL Classification: G10, G11, G14, G20, M41

Suggested Citation

Choi, Ki-Soon and So, Eric C. and Wang, Charles C. Y., Going by the Book: Valuation Ratios and Stock Returns (August 26, 2021). Available at SSRN: https://ssrn.com/abstract= or http://dx.doi.org/10.2139/ssrn.3854022

Ki-Soon Choi

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Eric C. So (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Charles C. Y. Wang

Harvard Business School (HBS) ( email )

Soldiers Field
Boston, MA 02163
United States

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