A Simple Model Relating the Expected Return (Risk) to the Book-to-Market and the Forward Earnings-to-Price Ratios

9 Pages Posted: 4 Apr 2005

See all articles by James A. Ohlson

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: February 2005

Abstract

This paper exploits a well-known valuation framework to assess how a firm's discount factor relates to basic accounting ratios. Specifically, a parametric version of the Residual Income Valuation (RIV) model provides the framework. It is shown that the discount-factor relates positively to the forward earnings-to-price ratio and negatively to the book-to-price ratio. The result bears on the empirical research suggesting that the book-to-market ratio should be viewed as a risk-factor.

Keywords: Valuation, Risk, Return, Book-to-market, Earnings-to-price

JEL Classification: M4, G1, G3

Suggested Citation

Ohlson, James A., A Simple Model Relating the Expected Return (Risk) to the Book-to-Market and the Forward Earnings-to-Price Ratios (February 2005). Available at SSRN: https://ssrn.com/abstract=683304 or http://dx.doi.org/10.2139/ssrn.683304

James A. Ohlson (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

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