To examine factors influencing and constraining the decision to recognize zero goodwill impairment, this study selected firms that encountered book-to-market
ratios above one for three consecutive years.
Beside market, size and book-to-market
, we investigate whether earnings-to-price, sales-to-price, dividends-to-price, liquidity and momentum are priced risk factors.
Fama and French (1992)--hereafter F&F--and Jegadeesh and Titman (1993) convincingly summarized the evidence that "diversifiable" individual characteristics, like book-to-market
, size and momentum, could capture important cross-sectional variation in average stock returns.
I study the influence of takeover activity on common factors, size and book-to-market
. After controlling for takeovers, I find that the size effect is reduced by over 40% and is no longer an anomaly.
In any event, assuming these two value approaches imply very different portfolios, the Research Affiliates paper tests a Eugene Portfolio that is long risky stocks and short safe stocks, but which is indifferent to book-to-market
Table 1 Median ROE (%), market cap and price-to-book across years (1970-2006) Decile Median ROE (%) Median Market Median Cap ($mill) Book-to-Market
1 27.9830 212.7712 0.3518 2 18.7536 250.0344 0.4717 3 15.2553 214.5507 0.5928 4 13.0804 187.3163 0.7012 5 11.1291 175.5919 0.7859 6 9.1034 148.8704 0.8886 7 6.5518 116.8763 0.9878 8 2.9103 94.5655 1.0242 9 -5.4105 74.2511 1.0386 10 -37.7547 44.5838 0.8322 While higher earnings increase the return on equity, the return earned by stockholders on their investment is affected by the price of the stock.
The value coefficient is positive for all high book-to-market
Our regression model includes variables like, whether stock is in the option category or not, the market capitalisation of the firm, book-to-market
ratio, average trading volume, promoters' stock holdings and total institutional holdings.
* Gerard Hoberg, University of Maryland, and Ivo Welch, Brown University and NBER, "Better Factor Portfolios and Pricing Book-to-Market
Characteristics with the Fama-French Factor Model"
In general institutional lenders perceive small and high book-to-market
borrowers as systematically riskier than larger borrowers with low book-to-market
ratios, consistent with the asset pricing approach in Fama and French (1993).