Firms with high book to market ratios tend to have higher stock returns (e.
Examining (6) we can see that return can be characterized as dependent on the difference between the two period's book to market ratios ([BV.
2973) explain the motivation for using the book to market ratio as a proxy for a factor which affects expected returns by noting that the dividend per share is earnings per share less the change in book value per share.
In addition, we find that the fact that the definition of return contains the book to market ratio and market size (and thus the Fama and French (1993) mimicking factors) from two successive time periods offers a partial explanation for the well known serial correlation of returns (e.
2994) reason, in particular, that a single period estimate of book value has too much noise to contain all the information about the book to market ratio that is contained in previous return.
Although the Fama and French portfolios are sorted only on book to markets once each (previous) year in June, we assume that this annual sorting serves as a proxy for sorting based on each previous month's book to market ratio.