Working Paper: NBER ID: w5604
Authors: Kent Daniel; Sheridan Titman
Abstract: Firm size and book-to-market ratios are both highly correlated with the returns of common stocks. Fama and French (1993) have argued that the association between these firm characteristics and their stock returns arises because size and book-to-market ratios are proxies for non-diversifiable factor risk. In contrast, the evidence in this paper indicates that the return premia on small capitalization and high book-to-market stocks does not arise because of the co-movements of these stocks with pervasive factors. It is the firm characteristics and not the covariance structure of returns that explain the cross-sectional variation in stock returns.
Keywords: stock returns; firm characteristics; book-to-market ratios; size effect
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm characteristics (L20) | stock returns (G12) |
| high book-to-market stocks covary with other high book-to-market stocks (C58) | no separate risk factor (I12) |
| traditional measures of risk (D81) | expected returns (G17) |
| expected returns do not relate to loadings on market, HML, or SMB (G19) | firm characteristics explain returns (G32) |