Book-to-market ratios as predictors of market returns

The bask-to-market ratio of the Dow Jones Industrial Average predicts market returns and small firm excess returns over the period 1926-1994. The DJIA book-to-market ratio contains information about future returns that is not captured by other variables such as interest yield spreads and dividend yields. The DJIA book-to-market ratio's predictive ability is specific to the pre-1960 sample. In contrast, the S&P book-to-market ratio provides some predictive ability in the post-1960 period, although this relation is dramatically weaker than the Dow Jones pre-1960 findings. The predictive ability of book-to-market ratios appears to stem from the relation between book value and future earnings. (C) 1998 Elsevier Science S.A. All rights reserved.