Economic Forces, Fundamental Variables, and Equity Returns

We investigate whether size and book-to-market values of equity are proxying for macroeconomic risks found in Chen, Roll, and Ross's multifactor model or are measures of stocks' risk exposure to relative distress. We find that the role of size subsumes stocks' risk exposures associated with the Chen, Roll, and Ross's factors and that the Chen, Roll, and Ross's multifactor model does not explain the book-to-market values of equity effect. We also find that size and book-to-market values of equity are related to relative distress and that relative distress can explain the size effect, but only partially the effect of book-to-market values of equity, on average stock returns. Copyright 1994 by University of Chicago Press.

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