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

Jerry W. Chen*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 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 languageEnglish
Pages (from-to)137-154
Number of pages18
JournalAccounting and Finance
Volume52
Issue numberSUPPL.1
DOIs
Publication statusPublished - Oct 2012

Scopus Subject Areas

  • Accounting
  • Finance
  • Economics, Econometrics and Finance (miscellaneous)

User-Defined Keywords

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

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