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

Eugene F. Fama and Kenneth R. French
The Journal of Finance
Vol. 50, No. 1 (Mar., 1995), pp. 131-155
Published by: Wiley for the American Finance Association
DOI: 10.2307/2329241
Stable URL: http://www.jstor.org/stable/2329241
Page Count: 25
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Size and Book-to-Market Factors in Earnings and Returns
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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.

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