A positive buy trade performance thus indicates that managers buy stocks that subsequently outperform other stocks with similar stock characteristics with regard to firm size,
book-to-market ratio, and momentum.
Stattman (1980) and Rosenberg, Reid, and Lanstein (1985) are the pioneer researchers who document the relationship between expected returns and
book-to-market ratio. Growth firms are those firms that have low BTM ratio and value firms are those that have high BTM ratio.
Prior studies argue that existing top managers may not have reported goodwill impairment losses (by reporting zero goodwill impairment) when their firms'
book-to-market ratio was above one because of concern for their personal reputations (Beatty and Weber 2006, Masters-Stout et al.
We conclude that a model, which incorporates market factor, firm size,
book-to-market ratio, earnings-to-price ratio and liquidity, provides a good description of the variation in stock returns compared to the competing models.
al (2004) find that US firms opting for rights offers tend to have a higher
book-to-market ratio, a higher return on assets, a higher current ratio, and a lower level of debt.
There was a significant negative relationship between
book-to-market ratio and stock returns in both conditions which also contradicts the emerging market research findings of Claessens et al.
Further, Harvey and Siddique [3] and Wen and Yang [4] argue that conditional coskewness, which could capture similar information contained in the size and
book-to-market ratio, complements market beta to explain the return.
The F-score originally was developed for firms with high
book-to-market ratio. However, it has been found to be robust across different levels of financial health.
Value companies are characterized by high rates of price fundamentals (profits, dividends, cashflow and
book-to-market ratio), whereas growth companies present low rates (GHARGHORI; STRYJKOWSKI; VEERARAGHAVAN, 2012).
As we move down to lower deciles, median
book-to-market ratio also increases across years.