Accounting Ratios and the Cross-Section of Expected Stock Returns

Download or read book Accounting Ratios and the Cross-Section of Expected Stock Returns written by Adriana S. Cordis and published by . This book was released on 2013 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: Clean-surplus accounting implies that a firm's stock return can be decomposed into a function of the firm's return on equity, book-to-market equity ratio, and dividend-price ratio. Consequently, the variation in these ratios across firms should be indicative of cross-sectional variation in conditional expected returns. Although this prediction can be tested via cross-sectional regressions, the analysis suggests that ordinary-least-squares estimates of the regression coefficients are sensitive to extreme return observations. To address this issue, I develop an outlier-resistant approach for estimating the regression coefficients. The outlier-resistant estimates provide substantial evidence of the predicted cross-sectional relation between accounting ratios and expected returns.