The Journal of Finance Forthcoming Article Abstract

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Abstract:
The market factor, an investment factor, and a return-on-assets factor summarize the cross-sectional variation of expected stock returns. The new three-factor model substantially outperforms traditional asset pricing models in explaining anomalies associated with short-term prior returns, financial distress, net stock issues, asset growth, earnings surprises, and valuation ratios. The model's performance, combined with its economic intuition based on q-theory, suggests that it can be used to obtain expected return estimates in practice.