Tangible and Intangible Information in Emerging Markets

High book-to-market stocks earn higher average returns than low book-to-market stocks. This result has been verified using stock returns from the U.S., developed, and emerging markets. Why B/M explains expected returns is still an open question. In this paper, we use stock returns representing twenty-five emerging markets to differentiate between competing theories. Our results differ from papers studying the U.S. stock market. For emerging markets, the component of book-to-market that is related to tangible information (past accounting performance) is significantly related to expected returns while the component related to intangible information is not. Our evidence is consistent across emerging market regions, across size groups, and across subperiods. We attempt to differentiate between overreaction and risk explanations for the B/M effect. We find some evidence to support overreaction but find no support for the risk explanation