Accounting for Asset Pricing Factors

Stephen Penman and Xiao‐Jun Zhang

Journal of Business Finance & Accounting, 2025, vol. 52, issue 3, 1557-1584

Abstract: Many accounting numbers appear in standard factor models but without a clear explanation. The numbers are generated under accounting principles that deal with risk, providing an explanation but also a critique of how extant models identify accounting‐based factors. That leads to a revised factor construction. Accounting numbers are codetermined in a double‐entry system, a feature that is exploited in packaging the factors into a model. Rather than entering as the separate, additive factors, adding to the “factor zoo,” they are combined parsimoniously to capture the information they jointly convey about risk and return in the double‐entry system. Empirical tests confirm.

Date: 2025
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https://doi.org/10.1111/jbfa.12858

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Journal of Business Finance & Accounting is currently edited by P. F. Pope, A. W. Stark and M. Walker

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