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Market Reactions to Tangible and Intangible Information

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  • KENT DANIEL
  • SHERIDAN TITMAN

Abstract

The book-to-market effect is often interpreted as evidence of high expected returns on stocks of "distressed" firms with poor past performance. We dispute this interpretation. We find that while a stock's future return is unrelated to the firm's past accounting-based performance, it is strongly negatively related to the "intangible" return, the component of its past return that is orthogonal to the firm's past performance. Indeed, the book-to-market ratio forecasts returns because it is a good proxy for the intangible return. Also, a composite equity issuance measure, which is related to intangible returns, independently forecasts returns. Copyright 2006 by The American Finance Association.

Suggested Citation

  • Kent Daniel & Sheridan Titman, 2006. "Market Reactions to Tangible and Intangible Information," Journal of Finance, American Finance Association, vol. 61(4), pages 1605-1643, August.
  • Handle: RePEc:bla:jfinan:v:61:y:2006:i:4:p:1605-1643
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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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