dMt

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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Thus, dBt-k, t is the change in book equity per share for the preceding one, three, or five fiscal years, and dMt-k, t and NSt-k, t are the changes in price per share and split-adjusted shares outstanding for the k months that end in December.

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The average slopes for dMt-k, t and dBt-k, t are close to zero in the 1963-2006 estimates of (6) for ABT stocks (Table 2), so the slope for It-k, t = dMt-k, t - dBt-k, t must be close to zero.

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During 1963-2006, using the components of BMt (that is, dMt-k, t, dBt-k, t, and BMt-k) to predict ABT returns provides estimates of expected returns that are not reliably better than the estimates from BMt alone.

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And the slope for BMt-k, which summarizes older forecasts of cashflows and returns, should be closer to zero than the average slope for dBt-k, t, and / or the average slope for dMt-k, t.

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On the other hand, if the average slopes for the components of BMt are equal in magnitude, positive for BMt-k and dBt-k, t and negative for dMt-k, t, the unavoidable conclusion is that forecasts of returns from the components collapse to forecasts from BMt, so there is no additional information in the origins of BMt beyond that in BMt alone.

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If changes in book equity are about as relevant as changes in price, then information about the origins of the book-to-market ratio does not enhance estimates of expected returns if the average slope for the lagged book-to-market ratio BMt-k in (5) is equal in magnitude to the average slopes for dMt-k, t and dBt-k, t.

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The interplay between dBt-k, t and dMt-k, t is also important in explaining how stocks migrate between value and growth.

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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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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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