BMt

The absence of reliable marginal explanatory power for dBt-k, t in the estimates of regression (6) for 1963-2006 formally confirms that the average slopes for dBt-k, t in (5) are not distinguishable from the average slopes for BMt-k.

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Intuitively, the slope for BMt in (6) is the marginal effect of BMt, given the lagged changes in price and book equity, dMt-k, t and dBt-k, t, but this is also the marginal effect of BMt-k in (5).

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Thus, for ABT stocks the breakdown of BMt in (1) seems to produce independent information about expected cashflows that enhances estimates of expected returns for 1927-1963, but not thereafter.

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Under the alternative, the average slopes for the components of BMt differ because the three components capture different mixes of information about expected cashflows and expected returns.

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Book equity in BMt is for the fiscal year ending in the preceding calendar year, and market equity is for the end of December of the preceding calendar year.

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In the valuation framework of equation (4), the results suggest that during 1927-1963 breaking the book-to-market ratio into its components unlocks information about expected cashflows that improves estimates of ABT expected returns, but during 1963-2006 BMt alone captures all the information about expected cashflows and expected returns in its components.

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The violations (always trivial) are caused by differences in the winsorized versions of BMt-k and BMt.

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The absence of explanatory power for dMt-k, t and dBt-k, t in the face of competition from BMt suggests that at least for

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In short, using BMt alone to forecast returns may bury independent information in its components about expected cashflows and expected returns.

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Our hypothesis is that past changes in price and book equity help disentangle the information in BMt about expected cashflows and expected returns, to enhance estimates of expected returns.

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