The reliability of the book-to-market ratio as a risk proxy

Abstract

This study examines whether the book-to-market ratio consistently explains the cross-section of stock returns through time. The results reveal that the book-to-market ratio is positively and significantly related to return in only 43% of the monthly regressions. Other value/growth variables such as Cash Flow,” “Sales Growth,” and “Size”; perform even more erratically than the book-to-market ratio, and are thus less likely to be viewed as legitimate risk proxies.