Explaining the Book-to-Market Ratio Effect from the Perspective of Behavioral Finance

This study aims to investigate the driving factors behind the long-term reversal of stock returns, with a particular focus on the causes of the book-to-market ratio effect. By analyzing A-share companies listed on the Shanghai and Shenzhen stock (Chinese) exchanges from 2010 to 2022, this paper decomposes the book-to-market ratio into the book income reflecting company fundamentals and the intangible income reflecting investor expectations, utilizing the Fama and MacBeth method for research. The results indicate that there is no correlation between stock returns and book income, but a negative correlation exists between stock returns and intangible income. Additionally, the returns generated by the reversal of intangible income cannot be fully explained by the Capital Asset Pricing Model. Therefore, this study suggests that the existence of the book-to-market ratio effect in the Chinese stock market is due to an excessive market reaction to the future prospects of companies rather than their fundamental factors.