A More Comparable Book-to-market Ratio



Book values are based on accounting rules that treat certain investments (e.g., R&D) di§erently than other investments. This results in less comparable book-to- market ratios across Örms. Consequently, the previously documented relation between book-to-market ratios and future returns weakens and the relation with proÖtability disappears during the 1990-2011 period, where R&D expenses are high. This paper employs common adjustments to generate more comparable book-to-market ratios. The Öndings suggest that the relation between (adjusted) book-to-market, proÖtability and stock returns remains robust throughout the sample period. Furthermore, the Öndings imply that (adjusted) proÖts of high (low) book-to-market Örms have high (low) systematic earnings risk.

This seminar is organised by the Erasmus Accounting Research Group.