41 Pages Posted: 30 Jul 2004
Date Written: July 2004
Valuation theory says that expected stock returns are related to three variables: the book-to-market equity ratio (B/M), expected profitability, and expected investment. Given B/M and expected profitability, higher rates of investment imply lower expected returns. But controlling for the other two variables, more profitable firms have higher expected returns, as do firms with higher B/M. These predictions are confirmed in our tests. Our results are qualitatively similar to earlier evidence, but in quantitative (economic) terms, there are some interesting surprises.
Suggested Citation: Suggested Citation
Fama, Eugene F. and French, Kenneth R., Profitability, Growth, and Average Returns (July 2004). CRSP Working Paper No. 558. Available at SSRN: https://ssrn.com/abstract=570343 or http://dx.doi.org/10.2139/ssrn.570343
By Eugene Fama