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

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

  • EUGENE F. FAMA
  • KENNETH R. FRENCH

Article first published online: 30th April 2012 DOI: 10.1111/j.1540-6261.1995.tb05169.x

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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