Risk-based explanation for the book-to-market effect

Jerry W. Chen

doi:10.1111/j.1467-629X.2011.00442.x

Risk-based explanation for the book-to-market effect

Jerry W. Chen^*

^*Corresponding author for this work

Research output: Contribution to journal › Journal article › peer-review

5 Citations (Scopus)

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.

Original language	English
Pages (from-to)	137-154
Number of pages	18
Journal	Accounting and Finance
Volume	52
Issue number	SUPPL.1
DOIs	https://doi.org/10.1111/j.1467-629X.2011.00442.x
Publication status	Published - Oct 2012

User-Defined Keywords

Asset pricing
Book-to-market effect
Efficient markets hypothesis
G12
G32

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10.1111/j.1467-629X.2011.00442.x

Cite this

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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.",

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KW - G12

KW - G32

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Risk-based explanation for the book-to-market effect

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