Firm life expectancy and the heterogeneity of the book-to-market effect

Huafeng (Jason) Chen

Journal of Financial Economics, 2011, vol. 100, issue 2, 402-423

Abstract: I argue that the reason the book-to-market effect is stronger in small stocks is because smaller stocks generally have shorter life expectancy and therefore shorter equity duration. I build a model in which the book-to-market effect is stronger in stocks with shorter life expectancy. Empirically, I use delisting probability as my proxy for life expectancy. The data support my model's central prediction and its additional implications for stock return and variance. My results provide a rational explanation for the heterogeneity of the book-to-market effect, evidence previously taken as support for behavioral explanations.

Keywords: Book-to-market; effect; Firm; life; expectancy; Delisting; Equity; duration (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:100:y:2011:i:2:p:402-423

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