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Are Firms in 'Boring' Industries Worth Less?

Author

Listed:
  • Chen, Jia

    (Peking University)

  • Hou, Kewei

    (OH State University)

  • Stulz, Rene M.

    (OH State University and ECGI, Brussels)

Abstract

Using theories from the behavioral finance literature to predict that investors are attracted to industries with more salient outcomes and that therefore firms in such industries have higher valuations, we find that firms in industries that have high industry-level dispersion of profitability have on average higher market-to-book ratios than firms in low dispersion industries. This positive relation between market-to-book ratios and industry profitability dispersion is economically large and statistically significant and is robust to controlling for variables used to explain firm-level valuation ratios in the literature. Consistent with the mispricing explanation of this finding, we show that firms in less boring industries have a lower implied cost of equity and lower realized returns. We explore alternative explanations for our finding, but find that these alternative explanations cannot explain our results.

Suggested Citation

  • Chen, Jia & Hou, Kewei & Stulz, Rene M., 2015. "Are Firms in 'Boring' Industries Worth Less?," Working Paper Series 2015-02, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2015-02
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    Cited by:

    1. Heiko Jacobs & Alexander Hillert, 2016. "Alphabetic Bias, Investor Recognition, and Trading Behavior," Review of Finance, European Finance Association, vol. 20(2), pages 693-723.
    2. Yang, Xiaolan & Wang, Jiaqi & Chen, Shu, 2024. "Impacts of CEO-employee pay disparity on investor behavior and market dynamics: Evidence from laboratory asset markets," China Economic Review, Elsevier, vol. 88(C).
    3. Michael Donadelli & Patrick Grüning & Steffen Hitzemann, 2019. "Understanding Macro and Asset Price Dynamics During the Climate Transition," Bank of Lithuania Discussion Paper Series 18, Bank of Lithuania.

    More about this item

    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
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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