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Is The Book-To-Market Ratio A Measure Of Risk?

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  • Robert F. Peterkort
  • James F. Nielsen

Abstract

We develop a leverage-based alternative to traditional asset pricing models to investigate whether the book-to-market ratio acts as a proxy for risk. We argue that the book-to-market ratio should act as a proxy because of the expected relations between (1) financial risk and measures of capital structure based on the market value of equity and (2) asset risk and measures of capital structure based on the book value of equity. We find no relation between average stock returns and the book-to-market ratio in all-equity firms after controlling for firm size, and an inverse relation between average stock returns and the book-to-market ratio in firms with a negative book value of equity. 2005 The Southern Finance Association and the Southwestern Finance Association.

Suggested Citation

  • Robert F. Peterkort & James F. Nielsen, 2005. "Is The Book-To-Market Ratio A Measure Of Risk?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 28(4), pages 487-502.
  • Handle: RePEc:bla:jfnres:v:28:y:2005:i:4:p:487-502
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    Cited by:

    1. Dalla Valle, Luciana & De Giuli, Maria Elena & Tarantola, Claudia & Manelli, Claudio, 2016. "Default probability estimation via pair copula constructions," European Journal of Operational Research, Elsevier, vol. 249(1), pages 298-311.
    2. repec:hur:ijaraf:v:7:y:2017:i:3:p:24-37 is not listed on IDEAS
    3. En-Der Su & Shih-Ming Huang, 2010. "Comparing Firm Failure Predictions Between Logit, KMV, and ZPP Models: Evidence from Taiwan’s Electronics Industry," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 17(3), pages 209-239, September.
    4. Tomáš Buus, 2008. "HML and SMB Premiums in the Recent Scholar Literature - Magnitude and Nature," Český finanční a účetní časopis, University of Economics, Prague, vol. 2008(2), pages 31-41.
    5. Huang, I-Hsiang, 2011. "The cyclical behavior of the risk of value strategy: Evidence from Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 19(4), pages 404-419, September.
    6. repec:kap:regeco:v:53:y:2018:i:1:d:10.1007_s11149-017-9340-z is not listed on IDEAS

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