Stock Valuation and Learning about Profitability
AbstractWe develop a simple approach to valuing stocks in the presence of learning about average profitability. The market-to-book ratio (M/B) increases with uncertainty about average profitability, especially for firms that pay no dividends. M/B is predicted to decline over a firm's lifetime due to learning, with steeper decline when the firm is young. These predictions are confirmed empirically. Data also support the predictions that younger stocks and stocks that pay no dividends have more volatile returns. Firm profitability has become more volatile recently, helping explain the puzzling increase in average idiosyncratic return volatility observed over the past few decades.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8991.
Date of creation: Jun 2002
Date of revision:
Publication status: published as Lubos PÁstor & Veronesi Pietro, 2003. "Stock Valuation and Learning about Profitability," Journal of Finance, American Finance Association, vol. 58(5), pages 1749-1790, October.
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Other versions of this item:
- Pástor, Luboš & Veronesi, Pietro, 2002. "Stock Valuation and Learning about Profitability," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3410, C.E.P.R. Discussion Papers.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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