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The Book-to-Price Effect in Stock Returns: Accounting for Leverage

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  • STEPHEN H. PENMAN
  • SCOTT A. RICHARDSON
  • İREM TUNA
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    Abstract

    ABSTRACT This paper lays out a decomposition of book-to-price (B/P) that derives from the accounting for book value and that articulates precisely how B/P "absorbs" leverage. The B/P ratio can be decomposed into an enterprise book-to-price (that pertains to operations and potentially reflects operating risk) and a leverage component (that reflects financing risk). The empirical analysis shows that the enterprise book-to-price ratio is positively related to subsequent stock returns but, conditional upon the enterprise book-to-price, the leverage component of B/P is "negatively" associated with future stock returns. Further, both enterprise book-to-price and leverage explain returns over those associated with Fama and French nominated factors-including the book-to-price factor-albeit negatively so for leverage. The seemingly perverse finding with respect to the leverage component of B/P survives under controls for size, estimated beta, return volatility, momentum, and default risk. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2007.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Accounting Research.

    Volume (Year): 45 (2007)
    Issue (Month): 2 (05)
    Pages: 427-467

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    Handle: RePEc:bla:joares:v:45:y:2007:i:2:p:427-467

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    Cited by:
    1. Anginer, Deniz & Yildizhan, Celim, 2010. "Is there a distress risk anomaly ? pricing of systematic default risk in the cross section of equity returns," Policy Research Working Paper Series 5319, The World Bank.
    2. Richardson, Scott & Tuna, Irem & Wysocki, Peter, 2010. "Accounting anomalies and fundamental analysis: A review of recent research advances," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 50(2-3), pages 410-454, December.
    3. George, Thomas J. & Hwang, Chuan-Yang, 2010. "A resolution of the distress risk and leverage puzzles in the cross section of stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 96(1), pages 56-79, April.
    4. Panayiotis Artikis & Georgia Nifora, 2012. "Capital Structure, Macroeconomic Variables & Stock Returns. Evidence from Greece," International Advances in Economic Research, Springer, Springer, vol. 18(1), pages 87-101, February.
    5. Tarek S. Zaher, 2010. "Performance of debt free firms," Managerial Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 36(6), pages 491-501, June.
    6. Cai, Jie & Zhang, Zhe, 2011. "Leverage change, debt overhang, and stock prices," Journal of Corporate Finance, Elsevier, Elsevier, vol. 17(3), pages 391-402, June.
    7. Panayotis Artikis & Georgia Nifora, 2011. "Leverage and Returns in Three Countries of Southern European Region," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 3-26.
    8. Tarek Zaher, 2009. "Performance of Debt Free Firms," NFI Working Papers 2009-WP-04, Indiana State University, Scott College of Business, Networks Financial Institute.
    9. Ulrike Malmendier & Enrico Moretti & Florian S. Peters, 2012. "Winning by Losing: Evidence on the Long-Run Effects of Mergers," NBER Working Papers 18024, National Bureau of Economic Research, Inc.
    10. Tarek Zaher, 2011. "Does It Pay to Invest in Debt Free Firms During Recessions?," NFI Working Papers 2011-WP-22, Indiana State University, Scott College of Business, Networks Financial Institute.
    11. Maureen McNichols & Madhav V. Rajan & Stefan Reichelstein, 2014. "Conservatism Correction for the Market-To-Book Ratio and Tobin's q," CESifo Working Paper Series 4626, CESifo Group Munich.
    12. B. Matemilola & A. Bany-Ariffin & W. Azman-Saini, 2012. "Financial Leverage and Shareholder’s Required Returns: Evidence from South Africa Corporate Sector," Transition Studies Review, Springer, Springer, vol. 18(3), pages 601-612, March.

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