Firm Life Expectancy and the Heterogeneity of the Book-to-Market Effect
59 Pages Posted: 22 Jun 2006 Last revised: 17 Nov 2010
Date Written: November 12, 2010
Abstract
I argue that the reason the book-to-market effect is stronger in small stocks is because smaller stocks generally have shorter life expectancy and therefore shorter equity duration. I build a model in which the book-to-market effect is stronger in stocks with shorter life expectancy. Empirically, I use delisting probability as my proxy for life expectancy. The data support my model's central prediction and its additional implications for stock return and variance. My results provide a rational explanation for the heterogeneity of the book-to-market effect, evidence previously taken as support for behavioral explanations.
Keywords: book-to-market effect, firm life expectancy, delisting, equity duration
JEL Classification: G12
Suggested Citation: Suggested Citation
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