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Examples
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The tests on the mean of the sum of the slopes for dBt-k, t and dMt-k, t in (5), in the last column of Part A of Table 3, confirm that for Tiny stocks the average slopes for dMt-k, t are further from zero than the slopes for dBt-k, t.
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Growth in book equity, dBt-k, t, tends to be high for growth stocks and low to negative for value stocks, the result of high earnings and reinvestment by growth stocks and low earnings and reinvestment by value stocks (Fama and French 1995).
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If we substitute It-k, t, for dMt-k, t in regression (5), nothing changes except the slope for dBt-k, t, which becomes the sum of the slopes for dBt-k, t and dMt-k, t in (5).
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In terms of regression (5), the null is that the average slopes for BMt-k, dBt-k, t, and dMt-k, t have the same magnitude, with positive average slopes for BMt-k and dBt-k, t and a negative slope for dMt-k, t.
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BMt-k + dBt-k, t - dMt-k, t, the slopes in (6) link directly to those in (5).
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The estimates of (5) for ABT stocks support this hypothesis, at least with respect to the average slopes for dMt-k, t and dBt-k, t.
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This behavior of fundamentals tends to persist in years after t, making dBt-k, t an interesting proxy for expected cashflows.
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To see the point, consider a simplified version of the Daniel-Titman model that captures the essence of their story. 4 Suppose the change in book equity, dBt-k, t, captures the tangible information that arises between t-k and t.
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The changes in the logs of price and book equity per share, dMt-k, t and dBt-k, t, are for the k months preceding the price and book equity in BMt.
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The last column of Part A shows the average value of the sum of the slopes for dBt-k, t and dMt-k, t along with the t-statistic for the average value.
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