Journal of Finance Vol. 50 No. 1 1995

Size and Book-to-Market Factors in Earnings and Returns

Eugene F. Fama¹; Kenneth R. French²

¹ University of Chicago · ² National Bureau of Economic Research

Abstract

We study whether the behavior of stock prices, in relation to size and book to market equity (BE/ME), reflects the behavior of earnings. Consistent with rational pricing, high BE/ME signals persistent poor earnings and low BE/ME signals strong earnings. Moreover, stock prices forecast the reversion of earnings growth observed after firms are ranked on size and BE/ME. Finally, there are market, size, and BE/ME factors in earnings like those in returns. The market and size factors in earnings help explain those in returns, but we find no link between BE/ME factors in earnings and returns.

DOI

10.2307/2329241

Volume

50

Issue

1

Pages

131

Sources

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