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Decomposing value: Changes in size or changes in book-to-market?

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  • Chai, Daniel
  • Chiah, Mardy
  • Zhong, Angel

Abstract

Recently, Gerakos and Linnainmaa (2018) decompose book-to-market into past book-to-market and changes in market and book values of equity. They find that book-to-market is highly persistent over time, and its explanatory power on US equity returns disappears when changes in market value of equity are accounted for. We find that, in both the US and Australian equity markets, changes in book-to-market stem largely from changes in firm size. However, contrary to the findings in the US market, book-to-market remains a strong predictor of Australian equity returns in the decomposition analysis. The results suggest that the finding in Gerakos and Linnainmaa (2018) is sample specific to the US equity market.

Suggested Citation

  • Chai, Daniel & Chiah, Mardy & Zhong, Angel, 2020. "Decomposing value: Changes in size or changes in book-to-market?," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:pacfin:v:64:y:2020:i:c:s0927538x2030679x
    DOI: 10.1016/j.pacfin.2020.101467
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    References listed on IDEAS

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    1. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    2. Chai, Daniel & Chiah, Mardy & Zhong, Angel, 2019. "Choosing factors: Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 58(C).
    3. Fama, Eugene F & French, Kenneth R, 1995. "Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-155, March.
    4. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
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    Cited by:

    1. Weizhou Su & Gaowen Lei & Sidai Guo & Hongche Dan, 2022. "Study on the Influence Mechanism of Environmental Management System Certification on Enterprise Green Innovation," IJERPH, MDPI, vol. 19(19), pages 1-20, September.
    2. Cheema, Muhammad A. & Chiah, Mardy & Zhong, Angel, 2021. "Resurrecting the size effect in Japan: Firm size, profitability shocks, and expected stock returns," Pacific-Basin Finance Journal, Elsevier, vol. 69(C).

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    More about this item

    Keywords

    Value premium; Decomposition; Firm characteristics; Changes in firm size;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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