Premium
Profitability, Value, and Stock Returns in Production‐Based Asset Pricing without Frictions
Author(s) -
BALVERS RONALD J.,
GU LI,
HUANG DAYONG
Publication year - 2017
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12426
Subject(s) - stylized fact , profitability index , capital asset pricing model , economics , stock (firearms) , financial economics , production (economics) , market value , econometrics , monetary economics , microeconomics , finance , macroeconomics , mechanical engineering , engineering
In a production‐based asset pricing model without adjustment costs and with decreasing returns to scale following Brock (1982), stock returns at the firm level are determined by profitability, the book‐to‐market ratio, and the change in future profitability prospects. Although firms with low book‐to‐market ratios are normally more profitable and profitable firms are predicted to have higher returns, the stylized fact that book‐to‐market ratios positively forecast returns still holds theoretically, but with specific predicted exceptions. These implications are confirmed empirically.