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Retained Earnings, and Book-to-market in the Cross Section of Expected Returns in Tehran Stock Exchange Market

Sharifi, Iman | 2021

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 54867 (44)
  4. University: Sharif University of Technology
  5. Department: Management and Economics
  6. Advisor(s): Keshavarz Haddad, Gholamreza
  7. Abstract:
  8. The book-to-market ratio is known as an anomaly variable in the financial literature. This variable has a high explanatory power in predicting the returns of companies in different capital markets across world; But understanding why it has the power to explain is still a matter of debate. In this study, we seek a better understanding of the explanatory power of the ratio of book-to-market ratio in explaining the annual return of cross-sectional data of stocks on the Tehran Stock Exchange. Book value can be divided into two parts: retained earnings and contributed capital, which have different economic meanings for readers of financial statements. Our hypothesis is that the predictive power of the book-to-market ratio arises from a component of book value that could be a good proxy for underlying earnings yield. Using the method of Fama and Macbeth (1973), we regress the annual return of cross-sectional data of companies listed on the Tehran Stock Exchange for the years 2001-2019 on the ratio of book-to-market ratio and its two components. Neither component of book-to-market ratio could eliminate the predictive power of this ratio; However, the ratio of retained Earnings-to-market ratio could show predictive power along with the book-to-market ratio
  9. Keywords:
  10. Stock Return ; Book to Morket Value ; Contributed Capital ; Retained Earnings ; Tehran Stock Exchange

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