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A framework for identifying accounting characteristics for asset pricing models, with an evaluation of book-to-price


Penman, Stephen H.; Reggiani, Francesco; Richardson, Scott; Tuna, İrem (2018). A framework for identifying accounting characteristics for asset pricing models, with an evaluation of book-to-price. European Financial Management, 24(4):488-520.

Abstract

We provide a framework for identifying accounting numbers that indicate risk and expected return. Under specified accounting conditions for measuring earnings and book value, book‐to‐price (B/P) indicates expected returns, providing justification for B/P in asset pricing models. However, the framework also points to earnings‐to‐price (E/P) as a risk characteristic. Indeed, E/P, rather than B/P, is the relevant characteristic when there is no expected earnings growth, but the weight shifts to B/P with growth. Using this framework we resolve a puzzle: in contrast to previous empirical research, we find that leverage is positively associated with future returns, as predicted by theory.

Abstract

We provide a framework for identifying accounting numbers that indicate risk and expected return. Under specified accounting conditions for measuring earnings and book value, book‐to‐price (B/P) indicates expected returns, providing justification for B/P in asset pricing models. However, the framework also points to earnings‐to‐price (E/P) as a risk characteristic. Indeed, E/P, rather than B/P, is the relevant characteristic when there is no expected earnings growth, but the weight shifts to B/P with growth. Using this framework we resolve a puzzle: in contrast to previous empirical research, we find that leverage is positively associated with future returns, as predicted by theory.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:12 February 2018
Deposited On:23 Aug 2019 10:49
Last Modified:25 Sep 2019 00:42
Publisher:Wiley-Blackwell Publishing, Inc.
ISSN:1354-7798
OA Status:Closed
Publisher DOI:https://doi.org/10.1111/eufm.12171
Other Identification Number:merlin-id:17049

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