Abstract
Fama and French (2008) provide evidence that past changes in book equity and price contain independent information about expected cash flows that can be used to improve estimates of expected returns. This paper focuses on international stock markets and re-examines whether the origins of the book-to-market ratio (BM) in terms of past changes in book equity and price enhance the estimates of expected returns provided by BM alone. Results are presented for All stocks as well as Microcap, Small, Big, and All but Microcap stocks trading in the UK, Germany, France, Italy, Canada, and Japan. The firm-level crosssectional regressions indicate that recent changes in book equity and price are more relevant than more distant changes to disentangle the information in BM about expected cash flows and expected returns, thus enhancing estimates of expected future returns. The tests also show that a change in book equity is much more informative about expected stock returns than a change in price.
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