Are Firms in "Boring" Industries Worth Less?

Jia Chen (), Kewei Hou and René Stulz

No 20880, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using theories from the behavioral finance literature to predict that investors are attracted to industries with more salient outcomes and that therefore firms in such industries have higher valuations, we find that firms in industries that have high industry-level dispersion of profitability have on average higher market-to-book ratios than firms in low dispersion industries. This positive relation between market-to-book ratios and industry profitability dispersion is economically large and statistically significant and is robust to controlling for variables used to explain firm-level valuation ratios in the literature. Consistent with the mispricing explanation of this finding, we show that firms in less boring industries have a lower implied cost of equity and lower realized returns. We explore alternative explanations for our finding, but find that these alternative explanations cannot explain our results.

JEL-codes: G12 G14 G31 G32 (search for similar items in EconPapers)
Date: 2015-01
New Economics Papers: this item is included in nep-bec and nep-cfn
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Citations: View citations in EconPapers (3)

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Working Paper: Are Firms in 'Boring' Industries Worth Less? (2015)
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