Articlediamond2018

Book-to-Market Ratio, return on equity and Brazilian Stock Returns

Rebeca Cordeiro da Cunha Araújo · Márcio André Veras Machado

41 citations0/0 files storedRAUSP Management Journal

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Financial Reporting and Valuation Research

Abstract

Purpose This study aims to analyze the influence of future expectations of the book-to-market ratio (B/M) and return on equity (ROE) in explaining the Brazilian capital market returns. Design/methodology/approach The study analyzed the explanatory power of risk-factor approach variables such as beta, size, B/M ratio, momentum and liquidity. Findings The results show that future expectations of the B/M ratio and ROE, when combined with proxies for risk factors, were able to explain part of the variations of Brazilian stock returns. With respect to risk factors approach variables, the authors verified the existence of size and B/M effects and a liquidity premium in the Brazilian capital market, during the period analyzed. Research limitations/implications This research was limited to the non-financial companies with shares traded at Brasil, Bolsa and Balcão, from January 1, 1995 to June 30, 2015. This way, the conclusions reached are limited to the sample used herein. Practical implications The evidences herein presented can also contribute to establishing investment strategies, considering that the B/M ratio may be calculated through accounting information announced by companies. Besides, using historical data enable investors, in a specific year, to calculate the predictor variables for the B/M ratio and ROE in the next year, which enhance the explanatory power of the current B/M, when combined in the form of an aggregate predictor variable for stock returns. Originality/value The main contribution of this study to the literature is to demonstrate how the expected future B/M ratio and ROE may improve the explanatory capacity of the stock return, when compared with the variables traditionally studied in the literature.

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References

1991Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations 1993Common risk factors in the returns on stocks and bonds 1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1978Specification Tests in Econometrics 1997On Persistence in Mutual Fund Performance 1992The Cross-Section of Expected Stock Returns 2002Unit root tests in panel data: asymptotic and finite-sample properties 1993Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency

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