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Market reactions to tangible and intangible information

The book-to-market effect is often interpreted as evidence of high expected returns on stocks of "distressed" firms with poor past performance. We dispute this interpretation. We find that while a stock's future return is unrelated to the firms' past accounting-based performance, it is strongly related to the "intangible" return, the component of its past return that is orthogonal to the firm's past performance. Indeed, the book-to-market ratio forecasts returns because it is a good proxy for the intangible return. Also, a composite equity issuance measure, which is related to intangible returns, independently forecasts returns..Printed Journal

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