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Firm life expectancy and the heterogeneity of the book-to-market effect

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  • Chen, Huafeng (Jason)

Abstract

I argue that the reason the book-to-market effect is stronger in small stocks is because smaller stocks generally have shorter life expectancy and therefore shorter equity duration. I build a model in which the book-to-market effect is stronger in stocks with shorter life expectancy. Empirically, I use delisting probability as my proxy for life expectancy. The data support my model's central prediction and its additional implications for stock return and variance. My results provide a rational explanation for the heterogeneity of the book-to-market effect, evidence previously taken as support for behavioral explanations.

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  • Chen, Huafeng (Jason), 2011. "Firm life expectancy and the heterogeneity of the book-to-market effect," Journal of Financial Economics, Elsevier, vol. 100(2), pages 402-423, May.
    • Handle: RePEc:eee:jfinec:v:100:y:2011:i:2:p:402-423
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    Cited by:

    1. Gonçalves, Andrei S., 2021. "The short duration premium," Journal of Financial Economics, Elsevier, vol. 141(3), pages 919-945.
    2. Erica X. N. Li & Dmitry Livdan & Lu Zhang, 2009. "Anomalies," The Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4301-4334, November.
    3. Olga Fullana & David Toscano, 2020. "Performance of Alternative Estimation Procedures of the Implied Equity Duration in a Small Stock Market," Sustainability, MDPI, vol. 12(5), pages 1-13, March.
    4. Ye Li & Chen Wang, 2023. "Valuation Duration of the Stock Market," Papers 2310.07110, arXiv.org.

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