Firm Life Expectancy and the Heterogeneity of the Book-to-Market Effect

59 Pages Posted: 22 Jun 2006 Last revised: 17 Nov 2010

See all articles by Huafeng (Jason) Chen

Huafeng (Jason) Chen

Fudan University - Fanhai International School of Finance (FISF)

Date Written: November 12, 2010

Abstract

I argue that the reason the book-to-market effect is stronger in small stocks is because smaller stocks generally have shorter life expectancy and therefore shorter equity duration. I build a model in which the book-to-market effect is stronger in stocks with shorter life expectancy. Empirically, I use delisting probability as my proxy for life expectancy. The data support my model's central prediction and its additional implications for stock return and variance. My results provide a rational explanation for the heterogeneity of the book-to-market effect, evidence previously taken as support for behavioral explanations.

Keywords: book-to-market effect, firm life expectancy, delisting, equity duration

JEL Classification: G12

Suggested Citation

Chen, Huafeng (Jason), Firm Life Expectancy and the Heterogeneity of the Book-to-Market Effect (November 12, 2010). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=910549

Huafeng (Jason) Chen (Contact Author)

Fudan University - Fanhai International School of Finance (FISF) ( email )

220 Handan Road
Shanghai, 200433
China

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