Stock returns and the Miller Modigliani valuation formula: Revisiting the Fama French analysis

Gil Aharoni, Bruce Grundy and Qi Zeng

Journal of Financial Economics, 2013, vol. 110, issue 2, 347-357

Abstract: Fama and French (2006) use the dividend-discount model to develop the role of expected profitability, expected investment, and the book-to-market ratio as predictors of stock returns. One reported empirical result is anomalous. The valuation model establishes that the comparative static relation between expected returns and expected investment is negative, yet it appears to be positive and insignificant. We show that the posited valuation relations apply at the firm level, and not at the per share level at which they were tested. Once the variables are measured at the firm level, all the Fama French predictions are validated.

Keywords: Book-to-market; Profitability; Investment; Expected return (search for similar items in EconPapers)
JEL-codes: G12 G32 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (43)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:110:y:2013:i:2:p:347-357

DOI: 10.1016/j.jfineco.2013.08.003

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