Stock Valuation and Learning About Profitability

Lubos Pástor, Pietro Veronesi
2002 Social Science Research Network  
We develop a simple approach to valuing stocks in the presence of learning about average pro¢tability.The market-to-book ratio (M/B) increases with uncertainty about average pro¢tability, especially for ¢rms that pay no dividends. M/B is predicted to decline over a ¢rm's lifetime due to learning, with steeper decline when the ¢rm is young. These predictions are con¢rmed empirically. Data also support the predictions that younger stocks and stocks that pay no dividends have more volatile
more » ... re volatile returns. Firm pro¢tability has become more volatile recently, helping explain the puzzling increase in average idiosyncratic return volatility observed over the past few decades.
doi:10.2139/ssrn.303390 fatcat:hlpd5auhjvey3kj235drbsmmse