Stock Valuation and Learning about Profitability

Pietro Veronesi and Pástor, Luboš
Authors registered in the RePEc Author Service: Lubos Pastor

No 3410, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a simple approach to valuing stocks in the presence of learning about average profitability. The market-to-book ratio (M/B) increases with uncertainty about average profitability, especially for firms that pay no dividends. M/B is predicted to decline over a firm's lifetime due to learning, with steeper decline when the firm is young. These predictions are confirmed empirically. Data also support the predictions that younger stocks and stocks that pay no dividends have more volatile returns. Firm profitability has become more volatile recently, helping explain the puzzling increase in average idiosyncratic return volatility observed over the past few decades.

Keywords: Valuation; Learning; Uncertainty; Profitability; Market to book (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2002-06
New Economics Papers: this item is included in nep-cfn and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Journal Article: Stock Valuation and Learning about Profitability (2003)
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