The Relationship between Components of the Book to Market Ratio and Stock Returns

The book-to-market ratio (B/M) is a noisy measure of expected stock returns because it also varies with expected cashflows evolution of B/M, in terms of past changes in book equity and price, contains independent information about expected cashflows that can be used to improve estimates of expected returns.This study examines the impact of the components of the book to market ratio on the explanatory power of stock returns. To this end, a sample of 185 companies listed in Tehran Stock Exchange during 1384 to 1393 were studied. To examine the explanatory power of stock returns by components of the B/M ratio, Fama and Macbeth regression (1973) and portfolio analysis approach are used. The results show that this improvement comes mainly from the change in price, against the results of other countries, and not from the change in book equity