A framework for identifying accounting characteristics for asset pricing models, with an evaluation of book-to-price

Penman, S H, Reggiani, F, Richardson, S A and Tuna, I (2018) A framework for identifying accounting characteristics for asset pricing models, with an evaluation of book-to-price. European Financial Management, 24 (4). pp. 488-520. ISSN 1468-036X

Abstract

We provide a framework for identifying accounting numbers that indicate risk and expected return. Under specified accounting conditions for measuring earnings and book value, book‐to‐price (B/P) indicates expected returns, providing justification for B/P in asset pricing models. However, the framework also points to earnings‐to‐price (E/P) as a risk characteristic. Indeed, E/P, rather than B/P, is the relevant characteristic when there is no expected earnings growth, but the weight shifts to B/P with growth. Using this framework we resolve a puzzle: in contrast to previous empirical research, we find that leverage is positively associated with future returns, as predicted by theory.

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Item Type: Article
Subject Areas: Accounting
Additional Information: © 2018 John Wiley & Sons. This is the peer reviewed version of the following article: 'A framework for identifying accounting characteristics for asset pricing models, with an evaluation of book-to-price', S H Penman, F Reggiani, S A Richardson, and I Tuna, European Financial Management, 12 February 2018, which has been published in final form at https://doi.org/10.1111/eufm.12171. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions. Francesco Reggiani acknowledges support from PwC Switzerland
Subjects: A > Accounting procedures
B > Book-keeping
Date Deposited: 18 May 2018 14:14
Last Modified: 16 Jul 2019 00:15
URI: http://lbsresearch.london.edu/id/eprint/981
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