Stock returns and the Miller Modigliani valuation formula: Revisiting the Fama French analysis

Gil Aharoni, Bruce Grundy*, Qi Zeng

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

92 Citations (Scopus)

Abstract

Fama and French (2006) use the dividend-discount model to develop the role of expected profitability, expected investment, and the book-to-market ratio as predictors of stock returns. One reported empirical result is anomalous. The valuation model establishes that the comparative static relation between expected returns and expected investment is negative, yet it appears to be positive and insignificant. We show that the posited valuation relations apply at the firm level, and not at the per share level at which they were tested. Once the variables are measured at the firm level, all the Fama French predictions are validated.

Original languageEnglish
Pages (from-to)347-357
Number of pages11
JournalJournal of Financial Economics
Volume110
Issue number2
DOIs
Publication statusPublished - Nov 2013
Externally publishedYes

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