Abstract
This paper provides global evidence supporting the hypothesis that expected return models are enhanced by the inclusion of variables that describe the evolution of book-to-market—changes in book value, changes in price, and net share issues. This conclusion is supported using data representing North America, Europe, Japan, and Asia. Results are highly consistent across all global regions and hold for small and big market capitalization subsets as well as in different subperiods. Variables measured over the past twelve months are more relevant than variables measured over the past thirty-six months, demonstrating that recent news is more important than old news.
Highlights
The international asset pricing research has identified a number of firm specific characteristics able to explain the cross-section of global equity returns
Our results show a significant relation between time t + 1 returns and net share issues computed over t − 6 − k and t − 6 implying that the market is very slow to react to management’s mispricing signal
While our results for North America agree with FF for the U.S market, we find that changes in book value have significantly greater impact on returns than price changes for Europe, Japan, and Asia
Summary
The international asset pricing research has identified a number of firm specific characteristics able to explain the cross-section of global equity returns. The cross-section of returns at time t + 1 is regressed on the time t cross-section of B/M ratios along with other characteristics such as market capitalization and momentum.1 While this approach has clearly demonstrated the efficacy of B/M in explaining the cross-section of returns, the empirical methodology inherently assumes that the time t observation of B/M contains the most relevant information for estimating expected returns. The alternative to this is that the history of B/M, the dynamic process by which B/M evolves from time t − k to time t, contains relevant information that can be used to improve on the model’s average return estimates. Using equity returns from twenty-three global markets over 1991–2016, we ask whether the inclusion of variables that describe the history of B/M improves empirical asset pricing models relative to models that include only the most recent realization of B/M
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