Two Factors Unit

 Two Elements Model Article

CFA Institute

Will be Two Elements Enough? The U. T. Evidence Author(s): George Leledakis and Ian Davidson Reviewed work(s): Source: Financial Analysts Journal, Volume. 57, No . 6 (Nov. - Dec., 2001), pp. 96-105 Posted by: CFA Institute Stable URL: http://www.jstor.org/stable/4480359. Accessed: 13/03/2013 15: 40 Your usage of the JSTOR archive shows your acceptance of the Conditions & Conditions of Use, available at. http://www.jstor.org/page/info/about/policies/terms.jsp

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Happen to be

Two

Factors

Enough?

The

U. K.

Evidence

and IanDavidson George Leledakis

valueof equityto marketplace that Somestudiesin the1990sdocumented publication valueof equity(MVE)capture valueof equity(BV/MV)and the market in in earnings theU. S. market the1963of variation stock thecross-sectional that however , two othervariablesargued, analysts Other 90 period. proportion ratio thesales-to-price (S/P)andthedebt-to-equity (D/E)-have more thanBV/MVandMVE. Theevidence stockreturns powerfor explanatory that data, indicates S/P and StockExchange fromLondon in the following paragraphs, the the absorb rolesofBV/MVandMVEin explaining DIEdonotentirely We in stockreturns theU. K. market. didfindthat of cross-section average of the further than contribution BV/MV power explanatory S/P hassignificant by powerof DIEis captured S/P. andMVE, buttheexplanatory

studies have noted that share returns can be predicted by company-specificvariables in a manner inconsistentwith the acceptedparadigms of modern finance-in particular, the main city asset prices model of Sharpe (1964) and The influentialwork of Fama and Lintner(1965). one particular French (1992) on the determinants of the crosssection of typical stock returnshas given emphasis to Famaand Frenchfound thatthe ratio the literature. of book worth of fairness to marketvalue of value (BV/MV)and the marketvalue of equity (MVE)as a proxyof the companysize sufficeto explaincrosssectionalvariationin stock returnsin the U. S. marketplace in the 1963-90 period. Barbee, Mukherji, and Raines (1996) argued, nevertheless , that two other variables-the sales-to-price ratio (S/P) as well as the ratio(D/E)-have moreexplanatory debt-to-equity electricity for inventory returnsthan BV/MV and MVE. 2 Why the company-specific variables ought to predict stock returnsis the subjectof controversy. Some believe these parameters are proxies for unobservablecommon risk factorsthat are in line with rational property pricing (e. g., Fama and French1993, 1995, 1996a). Others believe such variables may be used to get securities which might be systematically mispriced by the industry (e. g., Lakonishok, Shleifer, and Vishny 1994; Haugen and Baker1996; Daniel and Titman1997). Still others arguethatthe observedpredictiverelationships arelargelythe resultof data-snoopingbias (e. g., Lo

yany

is fellowandIan Davidson Leledakis a research George Busiat offinancialmanagement Warwick can be professor UnitedKingdom. of University Warwick, nessSchool, 96

and MacKinlay1990; Black1993; MacKinlay1995; White 2000) and survivorship bias (e. g., Kothari, Shanken, and Sloan 1995; Brownish and Goetzmann 1995; Brownish, Goetzmann, and Ross 1995). A numberof studies possess helped mitigateconcerns about data snooping by utilizing out-of-sample info (e. g., Chan, Hamao, and Lakonishok 1991; Famaand French Capaul, Rowley, and Sharpe1993; Coggin, and Doukas1998), data Arshanapalli, 1998; fromdifferenttime periods (e. g., Davis 1994; Davis, Fama, and French 2000), or info from a holdout...

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