Book to Market, Turnaround Probability and Stock Returns
نویسندگان
چکیده
Book to market (BM) has long been associated with growth opportunities. We argue that after a negative shock to earnings, the BM of the firm is mainly determined by the shortterm recovery ability of the firm. Firms that have high (low) probability to recover from a negative shock will have low (high) BM after a negative shock. We confirm this relation both analytically and empirically and show that differences in growth opportunities are unlikely to explain our results. We also find that firms with high probability of successful turnaround have extremely low return. Heterogeneity in turnaround probability can also serve as an explanation to previous empirical findings. JEL Classification: G10, G33
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