Going by the Book: Valuation Ratios and Stock Returns
Name
Choi-kschoi-SM15MR-Sloan-2021-thesis.pdf
Description
Thesis PDF
Size
641.02 KB
Format
Adobe PDF
Checksum (MD5)
780ac1f07a4d7cd431f8f26308ebe94b
Author(s)
Choi, Ki-Soon
Advisor(s)
So, Eric C. (Of Massachusetts Institute of Technology)
Date Issued
June 2021
Publisher
Massachusetts Institute of Technology
Abstract
I explore how institutional frictions interact with the changing nature of the book value of equity to impact stock returns. I first find that book-to-market is relatively less informative of future returns when it significantly deviates from other valuation multiples, and employing refined signals improve return predictability. Then, I find that a firm’s stock returns are still strongly correlated with its book-to-market portfolio returns even when book-to-market is less informative. Together, my findings suggest that institutional investors follow “brand indices” that overweight firms’ book-to-market to attract capital, which induces excess correlations along the book-to-market dimension, even when book-to-market is less informative of long-term future returns.
MIT Department
Sloan School of Management
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