Book-to-market effect and product life cycle

Abstract

This paper examines the relationship between product life cycle and book-to-market effect on cross-sectional stock returns. While previous papers suggest that the book-to-market effect is related to a firm’s market value and fundamental value, this paper examines the product life cycle, which directly affects future cash flows. We find that the book-to-market effect is stronger for firms with a long product life cycle, which is consistent with the mispricing story in explaining the book-to-market effect. We further find that the role of product life cycle is more critical for firms with high investor limited attention, and that the product life cycle in part explains intangible returns.