Cross-Sectional Determinants of Expected Returns
Posted: 11 May 1998
Date Written: June 18, 1996
We analyze the relation between equity returns, risk, and a rich set of security characteristics that includes institutional ownership, S&P 500 index membership, analyst following, and dispersion in analyst forecasts, in addition to previously examined variables such as the book-to-market ratio, firm size, the bid-ask spread, and lagged returns. Our primary objective is to determine whether these characteristics have marginal explanatory power relative to the Connor and Korajczyk (1988) risk factors. We also compare the different approaches that have been used to test asset pricing models against specific alternatives. We find that inferences are extremely sensitive to the sorting criteria used for portfolio formation, so that results based on regressions using portfolio returns should be interpreted with caution. Fama-MacBeth type regressions for individual securities suggest some new findings: risk-adjusted stock returns show a puzzling negative (and strongly significant) relation to the bid-ask spread, a negative relation with both size and share turnover, and a positive relation with both S&P 500 membership and analyst following. However, previously noted book-to-market and size effects are eliminated once account is taken of the above characteristics.
JEL Classification: G12, C21
Suggested Citation: Suggested Citation