Making Sense of Beta, Size and Book-to-Market

Posted: 20 Dec 1998

See all articles by Hersh Shefrin

Hersh Shefrin

Santa Clara University - Leavey School of Business

Meir Statman

Santa Clara University - Department of Finance

Date Written: November 1994

Abstract

We know from empirical studies that stocks of small companies with high book-to-market ratios have provided higher returns than stocks of large companies with low book-to-market ratios. But do senior executives, outside directors and financial analysts believe that? We show that senior executives, outside directors and financial analysts surveyed annually by Fortune magazine rank companies as if they believe that good companies are large companies with low book-to-market ratios. They rank stocks as if they believe the opposite of what empirical research has demonstrated; they rank stocks as if they believe that good stocks are stocks of good companies. We argue that a misperception of the relationship between the quality of a company and the expected rate of return of its stock underlies the superior performance of stocks of small, high book-to-market companies and the weak relationship betweenrealized returns and beta.

JEL Classification: G12

Suggested Citation

Shefrin, Hersh and Statman, Meir, Making Sense of Beta, Size and Book-to-Market (November 1994 ). Available at SSRN: https://ssrn.com/abstract=5870

Hersh Shefrin (Contact Author)

Santa Clara University - Leavey School of Business ( email )

Dept. of Finance
Santa Clara, CA 95053
United States
408-554-6893 (Phone)
408-554-4029 (Fax)

Meir Statman

Santa Clara University - Department of Finance ( email )

500 El Camino Real
Santa Clara, CA 95053
United States
408-554-4147 (Phone)
408-554-4029 (Fax)

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