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

  • Chen, Huafeng (Jason)

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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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 100 (2011)
Issue (Month): 2 (May)
Pages: 402-423

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Handle: RePEc:eee:jfinec:v:100:y:2011:i:2:p:402-423
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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