Compustat Selection Bias in Tests of the Sharpe-Lintner-Black CAPM
Posted: 5 Jul 1998
Date Written: October 1995
A recent paper of Kothari, Shanken, and Sloan (1995) (KSS) examines the argument of Fama and French (FF) (1992) that, contrary to the Sharpe-Lintner-Black (SLB) model, book-to-market ratio plays an important role in expected asset returns while market beta does not. KSS claim that part of the discrepancy between the FF empirical results and the SLB theory may be caused by bias in the FF study induced by their use of only COMPUSTAT-listed stocks. This paper uses a methodology that enables us to obtain cross-sectional variation in distress level for non-COMPUSTAT as well as COMPUSTAT firms. We find little if any evidence of COMPUSTAT selection bias, and no evidence that any bias that might exist is related to book-to-market ratio.
JEL Classification: G10, G11
Suggested Citation: Suggested Citation