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Profitability, Value, and Stock Returns in Production‐Based Asset Pricing without Frictions

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  • RONALD J. BALVERS
  • LI GU
  • DAYONG HUANG

Abstract

In a production‐based asset pricing model without adjustment costs and with decreasing returns to scale following Brock (1982), stock returns at the firm level are determined by profitability, the book‐to‐market ratio, and the change in future profitability prospects. Although firms with low book‐to‐market ratios are normally more profitable and profitable firms are predicted to have higher returns, the stylized fact that book‐to‐market ratios positively forecast returns still holds theoretically, but with specific predicted exceptions. These implications are confirmed empirically.

Suggested Citation

  • Ronald J. Balvers & Li Gu & Dayong Huang, 2017. "Profitability, Value, and Stock Returns in Production‐Based Asset Pricing without Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(7), pages 1621-1651, October.
    • Handle: RePEc:wly:jmoncb:v:49:y:2017:i:7:p:1621-1651
    DOI: 10.1111/jmcb.12426
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