Book-to-Market Ratio and Skewness of Stock Returns

ABSTRACT

This study demonstrates that stocks with low book-to-market ratios, also known as glamour stocks, have significantly more positive skewness in their return distributions compared to the return distributions of value stocks with high book-to-market ratios. The premium (discount) investors apply to these glamour (value) stocks also correlates significantly with the difference in return skewness. These findings suggest that the value/glamour-stock puzzle is partially explained by investor preference for positive skewness in stock returns. Such preference for skewness, which is consistent with investors having inverse S-shaped utility functions, is observed in such consumer behaviors as lottery purchases and gambling. This paper further documents significant predictive power of accounting-based measures, such as the book rate of return, with respect to the skewness of stock returns.

Keywords: accounting conservatism, value/glamour stocks, skewness, book-to-market ratio, growth

Source : Xiao-Jun Zhang (2013) Book-to-Market Ratio and Skewness of Stock Returns. The Accounting Review: November 2013, Vol. 88, No. 6, pp. 2213-2240.