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Estimating Stocks Return with Decomposition of the Book-to-Market Ratio: Evidences from Bovespa

Author

Listed:
  • Juliano Ribeiro de Almeida

    (FGV/EAESP)

  • William Eid Jr.

    (FGV/EAESP)

Abstract

The book-to-market (BM) ratio differs across stocks because to differences in expected cashflows and expected returns. The central hypothesis is that the evolution of BM, in terms of past changes in price and book equity, contains information about future cashflows that can be used to improve estimates of expected returns. This article used a database of Economática to extract a sample of non-financial companies shares listed on BOVESPA and test this hypothesis. The estimated regressions were performed monthly during the period July 1996 to June 2008. Both for large and mid caps as for small caps, the results do not favor this hypothesis and show that only the most recent BM is important to predict the assets returns. Furthermore, stock issues and repurchases are also related to future cashflows and it is expected to improve estimates of expected returns. However, the results provide no evidence favoring that.

Suggested Citation

  • Juliano Ribeiro de Almeida & William Eid Jr., 2010. "Estimating Stocks Return with Decomposition of the Book-to-Market Ratio: Evidences from Bovespa," Brazilian Review of Finance, Brazilian Society of Finance, vol. 8(4), pages 417-441.
    • Handle: RePEc:brf:journl:v:8:y:2010:i:4:p:417-441
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    More about this item

    Keywords

    CAPM; Book-to-market; risk; returns; pricing.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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