Market Reaction to Tangible and Intangible Information in Tehran Stock Exchange

There are two interpretations concerning the book to market ratio (B/M) effect. Financial economists believe that risk premium corresponding to high B/M stocks is due to high risk of these companies which are originated from previous weak performance. On the other hand, behaviorists believe “overreaction” as the main source of this phenomena. We investigate these two interpretations more deeply in this paper. We decompose past return into two components of tangible and intangible return and investigate the effect of each component on the future returns using panel regressions technique. Intangible return is the part of return which is not related to financial performance of the firm. Tangible return is the part of return which is caused by disclosure of accounting-based information. Our findings show there is no relation between future return and past financial performance of the firm, while there is a significant negative relation between future return and past intangible return. Therefore it seems that the main cause of the B/M effect is investors’ overreaction to intangible return.