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- Title
Risk-based explanation for the book-to-market effect.
- Authors
Chen, Jerry W.
- Abstract
This paper proposes a risk-based explanation for the book-to-market ( B/ M) effect. I decompose B/ M into net operating asset-to-market ( NOA/ M) and net financing asset-to-market ( NFA/ M) components. Portfolio analysis shows that (i) positive B/ M, NOA/ M and NFA/ M are positively related to future returns and (ii) negative B/ M, NOA/ M and NFA/ M are negatively related to future returns. To the extent that positive B/ M, NOA/ M and NFA/ M act as measures of asset risk and negative B/ M, NOA/ M and NFA/ M act as inverse measures of borrowing risk, the nonlinear relations between B/ M, NOA/ M and NFA/ M and future returns provide some evidence to support the risk-based explanation for the book-to-market effect in stock returns.
- Subjects
RISK management in business; MARKETS; RATE of return; INVESTMENTS; STOCK exchanges; ECONOMIC research
- Publication
Accounting & Finance, 2012, Vol 52, p137
- ISSN
0810-5391
- Publication type
Article
- DOI
10.1111/j.1467-629X.2011.00442.x