# Eugene F. Fama

## Robert R. McCormick Distinguished Service Professor of Finance

**Phone**:

**Address**:

Chicago, IL 60637

Eugene F. Fama, 2013 Nobel laureate in economic sciences, is widely recognized as the "father of modern finance." His research is well known in both the academic and investment communities. He is strongly identified with research on markets, particularly the efficient markets hypothesis. He focuses much of his research on the relation between risk and expected return and its implications for portfolio management. His work has transformed the way finance is viewed and conducted.

Fama is a prolific author, having written two books and published more than 100 articles in academic journals. He is among the most cited researchers in economics.

In addition to the Nobel Prize in Economic Sciences, Fama was the first elected fellow of the American Finance Association in 2001. He is also a fellow of the Econometric Society and the American Academy of Arts and Sciences. He was the first recipient of three major prizes in finance: the Deutsche Bank Prize in Financial Economics (2005), the Morgan Stanley American Finance Association Award for Excellence in Finance (2007), and the Onassis Prize in finance (2009). Other awards include the 1982 Chaire Francqui (Belgian National Science Prize), the 2006 Nicholas Molodovsky Award from the CFA Institute recognizing his work in portfolio theory and asset pricing, and the 2007 Fred Arditti Innovation Award given by the Chicago Mercantile Exchange Center for Innovation. He was awarded doctor of law degrees by the University of Rochester and DePaul University, a doctor honoris causa by the Catholic University of Leuven, Belgium, and a doctor of science honoris causa by Tufts University.

Fama is chairman of the Center for Research in Security Prices at Chicago Booth, which was founded 40 years ago to create the finest tools for tracking, measuring, and analyzing securities data. He is also an advisory editor of the *Journal of Financial Economics*.

Fama earned a bachelor's degree from Tufts University in 1960, followed by an MBA and PhD from the University of Chicago Graduate School of Business (now the Booth School) in 1964. He joined the GSB faculty in 1963.

Fama is a father of four and a grandfather of ten. He is an avid windsurfer and golfer, an opera buff, and a faded tennis player. He is a member of Malden Catholic High School's athletic hall of fame.

### 2016 - 2017 Course Schedule

Number | Name | Quarter |
---|---|---|

35901 | Theory of Financial Decisions I | 2016Â (Fall) |

35908 | Research Projects: Finance | 2017Â (Spring) |

### 2017 - 2018 Course Schedule

Number | Name | Quarter |
---|---|---|

35901 | Theory of Financial Decisions I | 2017Â (Fall) |

35908 | Research Projects: Finance | 2018Â (Spring) |

### Other Interests

Windsurfing, golf, tennis, biking, old movies, opera.

### Research Activities

Theoretical and empirical work on investments; price formation in capital markets; corporate finance.

With Kenneth R. French, "Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay," *Journal of Financial Economics* (April 2001).

"The Equity Premium," *Journal of Finance* (April 2002).

"New Lists: Fundamentals and Survival Rates," *Journal of Financial Economics* (August 2004).

"Disagreement, Tastes, and Asset Pricing" *Journal of Financial Economics* (March 2007).

"Profitability, Investment, and Average Returns," *Journal of Financial Economics* (December 2006).

New: Long-Horizon Returns

Date Posted:
May 24,
2017

We use bootstrap simulations to examine the properties of long-horizon U.S. stock market returns. Distributions of continuously compounded returns converge toward normal distributions as we extend the horizon from one to 30 years. We find no evidence, however, that distributions of dollar payoffs converge toward lognormal. We also find that, though largely irrelevant at short horizons, uncertainty about the expected return can have a substantial impact on uncertainty about long-horizon payoffs.

REVISION: Choosing Factors

Date Posted:
Mar 28,
2017

Our goal is to develop insights about the max squared Sharpe ratio for model factors as a metric for ranking asset-pricing models. We consider nested and non-nested models. The nested models are the CAPM, the three-factor model of Fama and French (1993), the five-factor extension in Fama and French (2015), and a six-factor model that adds a momentum factor. The non-nested models examine three issues about factor choice in the six-factor model: (i) cash profitability versus operating profitability as the variable used to construct profitability factors, (ii) long-short spread factors versus excess return factors, and (iii) factors that use small or big stocks versus factors that use both.

REVISION: Determining the Number of Priced State Variables in the ICAPM

Date Posted:
Nov 05,
2016

Suppose the ICAPM governs asset prices, and there are a total of S state variables that might be of hedging concern to investors. Can we determine which state variables are in fact of hedging concern? What does it mean to say that these state variables are priced, that is, that they give rise to special risk premiums in expected returns? The goal of this paper is to formulate this problem clearly and show when it can and cannot be solved. Ignoring estimation problems, it is possible to find the set of priced state variables when the state variables are identified (named). When we know the number of state variables but not their names, confident conclusions about even the number of them that produce special risk premiums are probably impossible, unless the number is zero, so the ICAPM collapses to the CAPM.

New: Choosing Factors

Date Posted:
Sep 06,
2016

We examine three issues about choice of factors in the five-factor model of Fama and French (FF 2015): (i) cash profitability (CP) versus operating profitability (OP) as the variable used to construct profitability factors, (ii) long â€“ short spread factors versus excess returns on the long or short ends of the spread factors, and (iii) factors that use the small or big ends of value, profitability, and investment factors versus averages of small and big components. We rank models primarily on the max squared Sharpe ratio for model factors, Sh2(f). This metric leads to a three-way tie for best model honors. We choose among them using other common performance metrics. The ultimate winner is the spread factor model of FF (2015) with the OP profitability factor replaced by a CP factor.

REVISION: International Tests of a Five-Factor Asset Pricing Model

Date Posted:
Dec 31,
2015

Average stock returns for North America, Europe, and Asia Pacific increase with the book-to-market ratio (B/M) and profitability and are negatively related to investment. For Japan the relation between average returns and B/M is strong, but average returns show little relation to profitability or investment. A five-factor model that adds profitability and investment factors to the three-factor model of Fama and French (1993) largely absorbs the patterns in average returns. As in Fama and French (2015a,b), the modelâ€™s prime problem is failure to capture fully the low average returns of small stocks whose returns behave like those of low profitability firms that invest aggressively.

REVISION: Multifactor Portfolio Efficiency and Multifactor Asset Pricing

Date Posted:
Nov 27,
2015

The concept of multifactor portfolio efficiency plays a role in Merton's intertemporal CAPM (the ICAPM), like that of mean-variance efficiency in the Sharpe-Lintner CAPM. In the CAPM, the relation between the expected return on a security and its risk is just the condition on security weights that holds in any mean-variance-efficient portfolio, applied to the market portfolio M. The risk-return relation of the ICAPM is likewise just the application to M of the condition on security weights that produces ICAPM multifactor-efficient portfolios. The main testable implication of the CAPM is that equilibrium security prices require that M is mean-variance-efficient. The main testable implication of the ICAPM is that securities must be priced so that M is multifactor-efficient. As in the CAPM, building the ICAPM on multifactor efficiency exposes its simplicity and allows easy economic insights.

New: Determining the Number of Priced State Variables in the ICAPM

Date Posted:
Nov 25,
2015

Suppose the ICAPM governs asset prices and there is a total of S state variables that might be of hedging concern to investors. Can we determine which state variables are, in fact, of hedging concern? What does it mean to say that these state variables are priced, that is, that they give rise to special risk premiums in expected returns? The goal of this paper is to formulate this problem clearly and show when it can and cannot be solved. Ignoring estimation problems, it is possible to find the set of priced state variables when the state variables are identified (named). When we know the number of state variables, but not their names, confident conclusions about even the number of them that produce special risk premiums are probably impossible, unless the number is zero, so the ICAPM collapses to the CAPM.

New: Multifactor Portfolio Efficiency and Multifactor Asset Pricing

Date Posted:
Nov 25,
2015

The concept of multifactor portfolio efficiency plays a role in Merton's intertemporal CAPM (the ICAPM), like that of mean-variance efficiency in the Sharpe-Lintner CAPM. In the CAPM, the relation between the expected return on a security and its risk is just the condition on security weights that holds in any mean-variance-efficient portfolio, applied to the market portfolio M. The risk-return relation of the ICAPM is likewise just the application to M of the condition on security weights that produces ICAPM multifactor-efficient portfolios. The main testable implication of the CAPM is that equilibrium security prices require that M is mean-variance-efficient. The main testable implication of the ICAPM is that securities must be priced so that M is multifactor-efficient. As in the CAPM, building the ICAPM on multifactor efficiency exposes its simplicity and allows easy economic insights.

New: Cross-Section Versus Time-Series Tests of Asset Pricing Models

Date Posted:
Nov 03,
2015

Tests of asset-pricing models commonly use either the cross-section regression approach of Fama and MacBeth (1973) or the time-series regression approach that centers on the GRS test of Gibbons, Ross, and Shanken (1989). The goal here is to discuss how the two approaches differ and their relative advantages.

REVISION: Dissecting Anomalies with a Five-Factor Model

Date Posted:
Jun 25,
2015

A five-factor model that adds profitability (RMW) and investment (CMA) factors to the three-factor model of Fama and French (1993) suggests a shared story for several average-return anomalies. Specifically, positive exposures to RMW and CMA (returns that behave like those of the stocks of profitable firms that invest conservatively) capture the high average returns associated with low market ÃŸ, share repurchases, and low stock return volatility. Conversely, negative RMW and CMA slopes (like those of relatively unprofitable firms that invest aggressively) help explain the low average stock returns associated with high ÃŸ, large share issues, and highly volatile returns.

REVISION: Incremental Variables and the Investment Opportunity Set

Date Posted:
Apr 17,
2015

Variables with strong marginal explanatory power in cross-section asset pricing regressions typically show less power to produce increments to average portfolio returns, for two reasons. (i) Adding an explanatory variable can attenuate the slopes in a regression. (ii) Adding a variable with marginal explanatory power always attenuates the values of other explanatory variables in the extremes of the regressionâ€™s fitted values. Without a restriction on portfolio weights, the maximum Sharpe ratios in the GRS statistic provide little information about an incremental variableâ€™s impact on the portfolio opportunity set.

New: Incremental Variables and the Investment Opportunity Set

Date Posted:
Apr 08,
2015

Variables with strong marginal explanatory power in cross-section asset pricing regressions typically show less power to produce increments to average portfolio returns, for two reasons. (1) Adding an explanatory variable can attenuate the slopes in a regression. (2) Adding a variable with marginal explanatory power always attenuates the values of other explanatory variables in the extremes of a regressionâ€™s fitted values. Without a restriction on portfolio weights, the maximum Sharpe ratios in the GRS statistic of Gibbons, Ross, and Shanken (1989) provide little information about an incremental variableâ€™s impact on the portfolio opportunity set.

REVISION: A Five-Factor Asset Pricing Model

Date Posted:
Sep 23,
2014

A five-factor model directed at capturing the size, value, profitability, and investment patterns in average stock returns performs better than the three-factor model of Fama and French (FF 1993). The five-factor modelâ€™s main problem is its failure to capture the low average returns on small stocks whose returns behave like those of firms that invest a lot despite low profitability. The modelâ€™s performance is not sensitive to the way its factors are defined. With the addition of profitability and investment factors, the value factor of the FF three-factor model becomes redundant for describing average returns in the sample we examine.

REVISION: Was There Ever a Lending Channel?

Date Posted:
Jul 25,
2013

The lending channel model posits that control of deposits that have reserve requirements allows the Fed to constrain the financing of the illiquid loans to businesses and consumers that are the comparative advantage of banks and their link to real activity. The constraint works because banks do not use traded liquid assets and liabilities with no reserve requirements to offset the effects of variation in deposits on loans. The results presented here are more consistent with a simple ...

REVISION: Does the Fed Control Interest Rates?

Date Posted:
Jul 02,
2013

To what extent does TF, the target Federal funds rate set by the Fed, influence other rates? There is lots of variation in rates unrelated to TF, and any effects of TF on rates dissipate quickly for longer maturities. For short rates, all the tests have interpretations in terms of: (i) a Fed that has the power to control rates and uses it, and (ii) a Fed that has little power over rates or chooses not to exercise its power. In the end, there is no conclusive evidence (here or elsewhere) on ...

REVISION: Capital Structure Choices

Date Posted:
Sep 21,
2011

We examine three pairs of cross-section regressions that test predictions of the tradeoff model, the pecking order model, and models that center on market conditions. The regressions examine (i) the split of new outside financing between share issues and debt, (ii) the split of debt financing between short-term and long-term, and (iii) the split of equity financing between share issues and retained earnings. The pecking order does well until the early 1980s, when the share issues that are its ...

REVISION: Size, Value, and Momentum in International Stock Returns

Date Posted:
Jun 23,
2011

In the four regions (North America, Europe, Japan, and Asia Pacific) we examine, there are value premiums in average stock returns that, except for Japan, decrease with size. Except for Japan, there is return momentum everywhere, and spreads in average momentum returns also decrease from smaller to bigger stocks. We test whether empirical asset pricing models capture the value and momentum patterns in international average returns and whether asset pricing seems to be integrated across the ...

REVISION: The Adjustment of Stock Prices to New Information

Date Posted:
Feb 15,
2011

There is an impressive body of empirical evidence which indicates that successive price changes in individual common stocks are very nearly independent. Recent papers by Mandelbrot and Samuelson show rigorously that independence of successive price changes is consistent with an efficient market, i.e., a market that adjusts rapidly to new information.
It is important to note, however, that in the empirical work to date the usual procedure has been to infer market efficiency from the ...

REVISION: My Life in Finance

Date Posted:
Mar 02,
2010

I was invited by the editors to contribute a professional autobiography for the Annual Review of Financial Economics. I focus on what I think is my best stuff. Readers interested in the rest can download my vita from the website of the University of Chicago, Booth School of Business. I only briefly discuss ideas and their origins, to give the flavor of context and motivation. I do not attempt to review the contributions of others, which is likely to raise feathers. Mea culpa in advance.

REVISION: Luck Versus Skill in the Cross Section of Mutual Fund Returns

Date Posted:
Feb 08,
2010

The aggregate portfolio of U.S. equity mutual funds is close to the market portfolio, but the high costs of active management show up intact as lower returns to investors. Bootstrap simulations suggest that few funds produce benchmark adjusted expected returns sufficient to cover their costs. If we add back the costs in expense ratios, there is evidence of inferior and superior performance (non-zero true alpha) in the extreme tails of the cross section of mutual fund alpha estimates.

Editorial: Clinical Papers and Their Role in the Development of Financial Economics

Date Posted:
Sep 14,
2009

This issue of the Journal of Financial Economics contains the first set of studies in the new Clinical Papers section. The objective of this section is to provide a high-quality professional outlet for scholarly studies of specific cases, events, practices, and specialized applications. By supplying insights about the world, challenging accepted theory, and using unique sources of data, clinical studies stand on their own as an important medium of research. Like the medical literature from ...

New: The Behavior of Interest Rates

Date Posted:
Feb 20,
2009

The evidence in Fama and Bliss (1987) that forward interest rates forecast future spot interest rates for horizons beyond a year repeats in the out-of-sample 1986-2004 period. But the inference that this forecast power is due to mean reversion of the spot rate toward a constant expected value no longer seems valid. Instead, the predictability of the spot rate captured by forward rates seems to be due to mean reversion toward a time-varying expected value that is subject to a sequence of ...

New: Organizational Forms and Investment Decisions

Date Posted:
Oct 07,
2008

This paper analyzes investment rules for various organizational forms that are distinguished by the characteristics of their residual claims. Different restrictions on residual claims lead to different decision rules. The analysis indicates that the investment decisions of open corporations, financial mutuals and nonprofits can be modeled by the value maximization rule. However, the decisions of proprietorships, partnerships, and closed corporations cannot in general be modeled by the market ...

Disagreement, Tastes, and Asset Prices

Date Posted:
Aug 08,
2008

Standard asset pricing models assume that (i) there is complete agreement among investors about probability distributions of future payoffs on assets, and (ii) investors choose asset holdings based solely on anticipated payoffs; that is, investment assets are not also consumption goods. Both assumptions are unrealistic. We provide a simple framework for studying how disagreement and tastes for assets as consumption goods can affect asset prices.

New: The Profitability and Equity Financing of Style Groups:1906-2006

Date Posted:
Jul 14,
2008

We extend the evidence of Fama and French (1995) on the post-1962 profitability and equity financing of firms in different style groups (small versus big, value versus growth) to 1926-2006. The emphasis is on whether equity-financed investment varies with cashflows and price-to-book ratios in ways that support or violate the pecking order model of Myers (1984) or the Q theory of investment. The long-term perspective from the results for 1926-2006 provides insights into inferences about the ...

New: The Anatomy of Value and Growth Stock Returns

Date Posted:
Dec 14,
2007

Average returns on value and growth portfolios are broken into dividends and three sources of capital gain: (1) growth in book equity, primarily from earnings retention, (2) convergence in price-to-book ratios (P/Bs) from mean reversion in profitability and expected returns, and (3) upward drift in P/B during 1927-2006. The capital gains of value stocks trace mostly to convergence: P/B rises as some value companies become more profitable and their stocks move to lower-expected-return groups ...

REVISION: Average Returns, B/M, and Share Issues

Date Posted:
Oct 12,
2007

The book-to-market ratio, B/M, is a noisy measure of expected stock returns because B/M also varies with expected cashflows. Our hypothesis is that the 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. The tests support this hypothesis, with results that are largely but not entirely similar for Microcap stocks (below the 20th NYSE market capitalization ...

REVISION: The Anatomy of Value and Growth Stock Returns

Date Posted:
Sep 04,
2007

We break average returns on value and growth portfolios into dividends and three sources of capital gain, (i) growth in book equity primarily due to earnings retention, (ii) convergence in price-to-book ratios (P/B) due to mean reversion in profitability and expected returns, and (iii) upward drift in P/B during 1927-2006. The capital gains of value stocks trace mostly to convergence: P/B rises as some value firms become more profitable and move to lower expected return groups. Growth in ...

New: Migration

Date Posted:
Jul 09,
2007

Migration of stocks across size and value portfolios contributes to the size and value premiums in average stock returns. The size premium is almost entirely generated by the small-capitalization stocks that earn extreme positive returns and thus become big-cap stocks. The value premium comes from (1) value stocks that improve in type because their companies are acquired by other companies or because they earn high returns and migrate to a neutral or growth portfolio, (2) growth stocks that ...

REVISION: Dissecting Anomalies

Date Posted:
Jun 10,
2007

The anomalous returns associated with net stock issues, accruals, and momentum are pervasive; they show up in all size groups (micro, small, and big) in cross-section regressions, and they are also strong in sorts, at least in the extremes. The asset growth and profitability anomalies are less robust. There is an asset growth anomaly in average returns on microcaps and small stocks, but it is absent for big stocks. Among profitable firms, higher profitability tends to be associated with ...

REVISION: Migration

Date Posted:
Feb 10,
2007

We study how migration of firms across size and value portfolios contributes to the size and value premiums in average stock returns. The size premium is almost entirely due to the small stocks that earn extreme positive returns and as a result become big stocks. The value premium has three sources: (i) value stocks that improve in type either because they are acquired by other firms or because they earn high returns and so migrate to a neutral or growth portfolio; (ii) growth stocks that ...

REVISION: Separation of Ownership and Control

Date Posted:
Aug 14,
2006

This paper analyzes the survival of organizations in which decision agents do not bear a major share of the wealth effects of their decisions. This is what the literature on large corporations calls separation of ownership and control. Such separation of decision and risk bearing functions is also common to organizations like large professional partnerships, financial mutuals and nonprofits. We contend that separation of decision and risk bearing functions survives in these organizations in ...

Agency Problems and Residual Claims

Date Posted:
Oct 10,
2005

Social and economic activities, like religion, entertainment, education, research, and the production of other goods and services, are carried on by different types of organizations, for example, corporations, proprietorships, partnerships, mutuals and nonprofits. There is competition among organizational forms for survival. The form of organization that survives in an activity is the one that delivers the product demanded by customers at the lowest price while covering costs.
The ...

The Behavior of Interest Rates

Date Posted:
Jun 15,
2005

The evidence in Fama and Bliss (1987) that forward interest rates forecast future spot interest rates for horizons beyond a year repeats in the out-of-sample 1986-2004 period. But the inference that this forecast power is due to mean reversion of the spot rate toward a constant expected value no longer seems valid. Instead, the predictability of the spot rate captured by forward raets seems to be due to mean reversion toward a time-varying expected value that is subject to a sequence of ...

Profitability, Growth, and Average Returns

Date Posted:
Jun 15,
2005

Valuation theory says that expected stock returns are related to three variables: the book-to-market equity ratio (B/M), expected profitability, and expected investment. Given B/M and expected profitability, higher rates of investment imply lower expected returns. But controlling for the other two variables, more profitable firms have higher expected returns, as do firms with higher B/M. These predictions are confirmed in our tests. Our results are qualitatively similar to earlier ...

The Value Premium and the CAPM

Date Posted:
Mar 16,
2005

We examine (i) how value premiums vary with firm size, (ii) whether the CAPM explains value premiums, and (iii) whether in general average returns compensate β in the way predicted by the CAPM. Loughran's (1997) evidence for a weak value premium among large firms is special to 1963 1995, U.S. stocks, and the book-to-market value-growth indicator. Ang and Chen's (2003) evidence that the CAPM can explain U.S. value premiums is special to 1926-1963. The CAPM's general problem is that ...

The Capital Asset Pricing Model: Theory and Evidence

Date Posted:
Jun 23,
2004

The capital asset pricing model (CAPM) of William Sharpe (1964) and John Lintner (1965) marks the birth of asset pricing theory (resulting in a Nobel Prize for Sharpe in 1990). Before their breakthrough, there were no asset pricing models built from first principles about the nature of tastes and investment opportunities and with clear testable predictions about risk and return. Four decades later, the CAPM is still widely used in applications, such as estimating the cost of equity capital for ...

Financing Decisions: Who Issues Stock?

Date Posted:
May 04,
2004

Financing decisions seem to violate the central predictions of the pecking order model about how often and under what circumstances firms issue equity. Specifically, most firms issue or retire equity each year, the issues are on average large, and they are not typically done by firms under duress. We estimate that during 1973-2002 the year-by-year equity decisions of more than half of our sample firms violate the pecking order. And contradictions are more common among larger firms.

The Equity Premium

Date Posted:
Nov 28,
2003

We estimate the equity premium using dividend and earnings growth rates to measure the expected rate of capital gain. Our estimates for 1951 to 2000, 2.55 percent and 4.32 percent, are much lower than the equity premium produced by the average stock return, 7.43 percent. Our evidence suggests that the high average return for 1951 to 2000 is due to a decline in discount rates that produces a large unexpected capital gain. Our main conclusion is that the average stock return of the last ...

New Lists: Fundamentals and Survival Rates

Date Posted:
May 07,
2003

The class of firms that obtain public equity financing expands dramatically in the 1980s and 1990s. After 1979, the rate at which new firms are listed on major U.S. stock exchanges jumps from about 160 to near 550 per year, and the characteristics of new lists change. The cross-section of new list profitability becomes progressively more left skewed, and growth becomes more right skewed. The result is a sharp decline in new list survival rates. We suggest that the changes in the ...

Market Efficiency, Long-Term Returns, and Behavioral Finance

Date Posted:
Dec 01,
2002

Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent over-reaction to information is about as common as under-reaction. And post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal. Consistent with the market efficiency prediction that apparent anomalies can also be due to methodology, the anomalies are sensitive to ...

The Equity Premium

Date Posted:
Jan 01,
2002

We estimate the equity premium using dividend and earnings growth rates to measure the expected rate of capital gain. Our estimates for 1951-2000, 2.55% and 4.32%, are much lower than the equity premium produced by the average stock return, 7.43%. Our evidence suggests that the high average return for 1951-2000 is due to a decline in discount rates that produces large unexpected capital gains. Our main conclusion is that the stock return of the last half-century is a lot higher than expected.

Testing Tradeoff and Pecking Order Predictions About Dividends and Debt

Date Posted:
Jan 01,
2002

Confirming predictions shared by the tradeoff and pecking order models, more profitable firms and firms with fewer investments have higher dividend payouts. Confirming the pecking order model but contradicting the tradeoff model, more profitable firms are less levered. Firms with more investments have less market leverage, which is consistent with the tradeoff model and a complex pecking order model. Firms with more investments have lower long-term dividend payouts, but dividends do not vary ...

Disappearing Dividends: Changing Firm Characteristics Or Lower Propensity To Pay?

Date Posted:
Dec 07,
2001

The percent of firms paying cash dividends falls from 66.5 in 1978 to 20.8 in 1999. The decline is due in part to the changing characteristics of publicly traded firms. Fed by new lists, the population of publicly traded firms tilts increasingly toward small firms with low profitability and strong growth opportunities characteristics typical of firms that have never paid dividends. More interesting, we also show that controlling for characteristics, firms become less likely to pay dividends.

Characteristics, Covariances, and Average Returns: 1929-1997

Date Posted:
Nov 05,
2001

The value premium in U.S. stocks returns is robust. The positive relation between average return and book-to-market equity (BE/ME) is as strong for 1929-63 as for the subsequent period studied in previous papers. Like others, we also find a size premium in stock returns. Small stocks have higher average returns than big stocks. The size premium is, however, weaker and less reliable than the value premium. The relations between average return and firm characteristics (size and BE/ME) are better ...

Forecasting Profitability and Earnings

Date Posted:
Nov 05,
2001

There is a strong presumption in economics that, in a competitive environment, profitability is mean reverting. We provide corroborating evidence. In a simple partial adjustment model, the estimated rate of mean reversion is about 40 percent per year. But a simple partial adjustment model with a uniform rate of mean reversion misses rich non-linear patterns in the behavior of profitability. Specifically, we find that mean reversion is faster when profitability is below its mean and when it is ...

Characteristics, Covariances, and Average Returns: 1929-1997

Date Posted:
Nov 05,
2001

The value premium in U.S. stocks returns is robust. The positive relation between average return and book-to-market equity (BE/ME) is as strong for 1929-63 as for the subsequent period studied in previous papers. Like others, we also find a size premium in stock returns. Small stocks have higher average returns than big stocks. The size premium is, however, weaker and less reliable than the value premium. The relations between average return and firm characteristics (size and BE/ME) are better ...

Taxes, Financing Decisions, and Firm Value

Date Posted:
Nov 05,
2001

We use cross-section regressions to study how a firm's value is related to dividends and debt. With a good control for profitability, the regressions can measure how the taxation of dividends and debt affects firm value. Simple tax hypotheses say that value is negatively related to dividends and positively related to debt. We find the opposite. We infer that dividends and debt convey information about profitability (expected net cash flows) missed by a wide range of control variables. This ...

Multifactor Explanations of Asset Pricing Anomalies

Date Posted:
Nov 05,
2001

Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cashflow/price, book-to-market equity, past sales growth, long-term past return, and short term past return. Because these patterns in average returns apparently are not explained by the CAPM, they are called anomalies. We find that, except for the continuation of short-term returns, the anomalies largely disappear in a three-factor model. Our results are consistent with ...

Size and Book to Market Factors in Earnings and Returns

Date Posted:
Nov 05,
2001

We study whether the behavior of stock prices, in relation to size and book to market equity (BE/ME), reflects the behavior of earnings. Consistent with rational pricing, high BE/ME signals persistent poor earnings and low BE/ME signals strong earnings. Moreover, stock prices forecast the reversion of earnings growth observed after firms are ranked on size and BE/ME. Finally, there are market, size, and BE/ME factors in earnings like those in returns. The market and size factors in earnings ...

Forecasting Profitability And Earnings

Date Posted:
Nov 05,
2001

There is a strong presumption in economics that, in a competitive environment, profitability is mean reverting. We provide corroborating evidence. In a simple partial adjustment model, the estimated rate of mean reversion is about 40 percent per year. But a simple partial adjustment model with a uniform rate of mean reversion misses rich non-linear patterns in the behavior of profitability. Specifically, we find that mean reversion is faster when profitability is below its mean and when it is ...

Investment Decisions, Financing Decisions, and Firm Value

Date Posted:
Nov 05,
2001

We estimate that the average value of a dollar invested in the U.S. corporate sector is $1.18. When we delete utilities and current assets, where opportunities for value added seem limited, the estimate jumps to $1.68. We use cross-section regressions to study how value is related to dividends and debt. The regressions can potentially identify tax effects, but they cannot disentangle other factors, including bankruptcy costs, agency costs, and asymmetric information. Simple tax stories say ...

Value Versus Growth: The International Evidence

Date Posted:
Jul 27,
2000

Value stocks have higher returns than growth stocks in markets around the world. For 1975-95, the difference between the average returns on global portfolios of high and low book-to-market stocks is 7.60% per year, and value stocks outperform growth stocks in 12 of 13 major markets. An international CAPM cannot explain the value premium, but a two-factor model that includes a risk factor for relative distress captures the value premium in international returns.

The Corporate Cost of Capital and the Return on Corporate Investment

Date Posted:
Jul 20,
2000

We estimate two internal rates of return for the non-financial corporate sector: (i) the return on the initial market values of the securities issued by firms, and (ii) the return on the cost of their investments. The return on cost is the return delivered by firms on investment outlays. The return on value is an estimate of the overall corporate cost of capital, that is, the return on investment required by the capital market. The estimate of the corporate cost of capital for 1950-96 is 10.72 ...

Taxes, Financing Decisions, and Firm Value

Date Posted:
Mar 10,
2000

We use cross-section regressions to study how a firm's value is related to dividends and debt. With a good control for profitability, the regressions can measure how the taxation of dividends and debt affects firm value. Simple tax hypotheses say that value is negatively related to dividends and positively related to debt. We find the opposite. We infer that dividends and debt convey information about profitability (expected net cash flows) missed by a wide range of control variables. This ...

Determining the Number of Priced State Variables in the ICAPM

Date Posted:
Aug 12,
1998

Suppose the ICAPM governs asset prices, and there are a total of S state variables that might be of hedging concern to investors. Can we determine which state variables are in fact of hedging concern? What does it mean to say that these state variables are priced, that is, that they give rise to special risk premiums in expected returns? The goal of this paper is to formulate this problem clearly and show when it can and cannot be solved. Ignoring estimation problems, it is possible to find ...

Discounting under Uncertainty

Date Posted:
Jan 29,
1998

Suppose asset pricing is governed by the CAPM or the ICAPM, and the expected one-period simple returns on the net cash flows (NCFs) of investment projects are constant through time. Then the NCFs are priced by discounting their expected values with their expected one-period simple returns. But when NCFs are priced by discounting their expected values with constant CAPM or ICAPM expected one-period simple returns, distributions of NCFs more than one period ahead are likely to be skewed right ...