Abstract
High book-to-market stocks earn higher average returns than low book-to-market stocks. This result has been verified using stock returns from the US, developed, and emerging markets. Why B/M explains expected returns is still an open question. In this paper, we use stock returns representing twenty-five emerging markets to test three different theories. Our results differ from papers studying the US stock market. For emerging markets, the component of book-to-market that is related to tangible information (past accounting performance) is significantly related to expected returns while the component related to intangible information (changes in price unrelated to accounting performance) is not. Our evidence is consistent across emerging market regions. We attempt to differentiate between overreaction and risk explanations for the B/M effect. We find some evidence to support overreaction but find no support for the risk explanation.
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