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Document Type

Journal Article

Authors

Jerry W. Chen

Department/Unit

Department of Accountancy and Law

Title

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

Language

English

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. © 2011 AFAANZ.

Keywords

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

Publication Date

2012

Source Publication Title

Accounting and Finance

Volume

52

Issue

Supplement s1

Start Page

137

End Page

154

Publisher

Wiley

ISSN (print)

08105391

ISSN (electronic)

1467629X

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