The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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COMPONENTS OF INVESTMENT PERFORMANCE*
Published: 06/01/1972 | DOI: 10.1111/j.1540-6261.1972.tb00984.x
Eugene F. Fama
Stock Returns, Expected Returns, and Real Activity
Published: 09/01/1990 | DOI: 10.1111/j.1540-6261.1990.tb02428.x
EUGENE F. FAMA
Measuring the total return variation explained by shocks to expected cash flows, time‐varying expected returns, and shocks to expected returns is one way to judge the rationality of stock prices. Variables that proxy for expected returns and expected‐return shocks capture 30% of the variance of annual NYSE value‐weighted returns. Growth rates of production, used to proxy for shocks to expected cash flows, explain 43% of the return variance. Whether the combined explanatory power of the variables—about 58% of the variance of annual returns—is good or bad news about market efficiency is left for the reader to judge.
Efficient Capital Markets: II
Published: 12/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb04636.x
EUGENE F. FAMA
REPLY
Published: 03/01/1976 | DOI: 10.1111/j.1540-6261.1976.tb03205.x
Eugene F. Fama
Taxes, Financing Decisions, and Firm Value
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00036
Eugene F. Fama, Kenneth R. French
We use cross‐sectional 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 information about profitability obscures any tax effects of financing decisions.
The Cross‐Section of Expected Stock Returns
Published: 06/01/1992 | DOI: 10.1111/j.1540-6261.1992.tb04398.x
EUGENE F. FAMA, KENNETH R. FRENCH
Two easily measured variables, size and book‐to‐market equity, combine to capture the cross‐sectional variation in average stock returns associated with market β, size, leverage, book‐to‐market equity, and earnings‐price ratios. Moreover, when the tests allow for variation in β that is unrelated to size, the relation between market β and average return is flat, even when β is the only explanatory variable.
Size and Book‐to‐Market Factors in Earnings and Returns
Published: 03/01/1995 | DOI: 10.1111/j.1540-6261.1995.tb05169.x
EUGENE F. FAMA, KENNETH R. FRENCH
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 help explain those in returns, but we find no link between BE/ME factors in earnings and returns.
Multifactor Explanations of Asset Pricing Anomalies
Published: 03/01/1996 | DOI: 10.1111/j.1540-6261.1996.tb05202.x
EUGENE F. FAMA, KENNETH R. FRENCH
Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/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 rational ICAPM or APT asset pricing, but we also consider irrational pricing and data problems as possible explanations.
The Equity Premium
Published: 12/17/2002 | DOI: 10.1111/1540-6261.00437
Eugene F. Fama, Kenneth R. French
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 half‐century is a lot higher than expected.
Dissecting Anomalies
Published: 07/19/2008 | DOI: 10.1111/j.1540-6261.2008.01371.x
EUGENE F. FAMA, KENNETH R. FRENCH
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 abnormally high returns, but there is little evidence that unprofitable firms have unusually low returns.
Value versus Growth: The International Evidence
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00080
Eugene F. Fama, Kenneth R. French
Value stocks have higher returns than growth stocks in markets around the world. For the period 1975 through 1995, the difference between the average returns on global portfolios of high and low book‐to‐market stocks is 7.68 percent per year, and value stocks outperform growth stocks in twelve of thirteen major markets. An international capital asset pricing model 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 Value Premium and the CAPM
Published: 09/19/2006 | DOI: 10.1111/j.1540-6261.2006.01054.x
EUGENE F. FAMA, KENNETH R. FRENCH
We examine (1) how value premiums vary with firm size, (2) whether the CAPM explains value premiums, and (3) 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 to 1995, U.S. stocks, and the book‐to‐market value‐growth indicator. Ang and Chen's (2005) evidence that the CAPM can explain U.S. value premiums is special to 1926 to 1963. The CAPM's more general problem is that variation in β unrelated to size and the value‐growth characteristic goes unrewarded throughout 1926 to 2004.
The Corporate Cost of Capital and the Return on Corporate Investment
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00178
Eugene F. Fama, Kenneth R. French
We estimate the internal rates of return earned by nonfinancial firms on (i) the initial market values of their securities and (ii) the cost of their investments. The return on value is an estimate of the overall corporate cost of capital. The estimate of the real cost of capital for 1950–96 is 5.95 percent. The real return on cost is larger, 7.38 percent, so on average corporate investment seems to be profitable. A by‐product of calculating these returns is information about the history of corporate earnings, investment, and financing decisions that is perhaps more interesting than the returns.
Business Cycles and the Behavior of Metals Prices
Published: 12/01/1988 | DOI: 10.1111/j.1540-6261.1988.tb03957.x
EUGENE F. FAMA, KENNETH R. FRENCH
The theory of storage says that the marginal convenience yield on inventory falls at a decreasing rate as inventory increases. The authors test this hypothesis by examining the relative variation of spot and futures prices for metals. As the hypothesis implies, futures prices are less variable than spot prices when inventory is low, but spot and futures prices have similar variability when inventory is high. The theory of storage also explains inversions of “normal” futures‐spot price relations around business‐cycle peaks. Positive demand shocks around peaks reduce metal inventories and, as the theory predicts, generate large convenience yields and price inversions.
The CAPM is Wanted, Dead or Alive
Published: 12/01/1996 | DOI: 10.1111/j.1540-6261.1996.tb05233.x
EUGENE F. FAMA, KENNETH R. FRENCH
Kothari, Shanken, and Sloan (1995) claim that βs from annual returns produce a stronger positive relation between β and average return than βs from monthly returns. They also contend that the relation between average return and book‐to‐market equity (BE/ME) is seriously exaggerated by survivor bias. We argue that survivor bias does not explain the relation between BE/ME and average return. We also show that annual and monthly βs produce the same inferences about the β premium. Our main point on the β premium is, however, more basic. It cannot save the Capital asset pricing model (CAPM), given the evidence that β alone cannot explain expected return.
Average Returns, B/M, and Share Issues
Published: 11/11/2008 | DOI: 10.1111/j.1540-6261.2008.01418.x
EUGENE F. FAMA, KENNETH R. FRENCH
The book‐to‐market ratio (B/M) is a noisy measure of expected stock returns because it 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 percentile) and All but Micro stocks (ABM).