# Eugene F. Fama's research while affiliated with University of Chicago and other places

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## Publications (138)

Value premiums, which we define as value portfolio returns in excess of market portfolio returns, are on average much lower in the second half of the July 1963–June 2019 period. But the high volatility of monthly premiums prevents us from rejecting the hypothesis that expected premiums are the same in both halves of the sample. Regressions that for...

This is a compendium of notes on taxes. Section 2 presents a general tax scheme. It is a tax on value added by labor and capital that does not favor one or the other. Section 3 contrasts taxation of business income for pass‐through entities and corporations. Section 4 discusses property taxes as taxes on housing services and so a form of income tax...

Observed contract structures are competitive solutions to the problem of maximizing stakeholder welfare when contracting is costly. Winning contract structures typically set fixed payoffs for most stakeholders, with residual risk borne by shareholders, who then get most of the decision rights. With rising interest in environmental, social, and gove...

We use the cross-section regression approach of Fama and MacBeth (1973) to construct cross-section factors corresponding to the time-series factors of Fama and French (2015). Time-series models that use only cross-section factors provide better descriptions of average returns than time-series models that use time-series factors. This is true when w...

Value premiums, which we define as value portfolio returns in excess of market portfolio returns, are on average much lower in the second half of the July 1963-June 2019 period. But the high volatility of monthly premiums prevents us from rejecting the hypothesis that expected premiums are the same in both halves of the sample. Regressions that for...

The continuously compounded (CC) interest rate on a one-month Treasury bill observed at the end of month t–1 is the sum of a CC expected real return and a CC expected inflation rate, Rt–1 = Et–1(rt) + Et–1(It). Two approaches are used to split Rt–1 between its two components. In the first, models for rt produce estimates of Et–1(rt), which are used...

We use bootstrap simulations to examine the properties of long-horizon U.S. stock market returns. We document the rate at which continuously compounded market returns converge toward normal distributions as we extend the horizon from 1 month to 30 years, and the rate at which dollar payoffs converge toward lognormal. We also verify that, though lar...

The average monthly premium of the Market return over the one-month T-bill return is substantial, as are average premiums of value and small stocks over Market. As the return horizon increases, premium distributions become more disperse, but they move to the right (toward higher values) faster than they become more disperse. There is, however, some...

Our goal is to develop insights about the maximum squared Sharpe ratio for model factors as a metric for ranking asset pricing models. We consider nested and non-nested models. The nested models are the capital asset pricing model, the three-factor model of Fama and French (1993), the five-factor extension in Fama and French (2015), and a six-facto...

The average monthly premium of the Market return over the one-month T-bill return is substantial, as are average premiums of value and small stocks over Market. As the return horizon increases, premium distributions become more disperse, but they move to the right (toward higher values) faster than they become more disperse. There is, however, some...

Average stock returns for North America, Europe, and Asia Pacific increase with the book-to-market ratio (B/M) and profitability and are negatively related to investment. For Japan, the relation between average returns and B/M is strong, but average returns show little relation to profitability or investment. A five-factor model that adds profitabi...

A five-factor model that adds profitability (RMW) and investment (CMA) factors to the three-factor model of Fama and French (1993) suggests a shared story for several average-return anomalies. Specifically, positive exposures to RMW and CMA (stock returns that behave like those of profitable firms that invest conservatively) capture the high averag...

Variables with strong marginal explanatory power in cross-section asset pricing regressions typically show less power to produce increments to average portfolio returns, for two reasons. (1) Adding an explanatory variable can attenuate the slopes in a regression. (2) Adding a variable with marginal explanatory power always attenuates the values of...

Average stock returns for North America, Europe, and Asia Pacific increase with the book-to-market ratio (B/M) and profitability and are negatively related to investment. For Japan, the relation between average returns and B/M is strong, but average returns show little relation to profitability or investment. A five-factor model that adds profitabi...

A five-factor model directed at capturing the size, value, profitability, and investment patterns in average stock returns performs better than the three-factor model of Fama and French (FF, 1993). The five-factor model's main problem is its failure to capture the low average returns on small stocks whose returns behave like those of firms that inv...

The Nobel Foundation asks that the Nobel lecture cover the work for which the Prize is awarded. The announcement of this year's Prize cites empirical work in asset pricing. I interpret this to include work on efficient capital markets and work on developing and testing asset pricing models—the two pillars, or perhaps more descriptive, the Siamese t...

A five-factor model that adds profitability (RMW) and investment (CMA) factors to the three-factor model of Fama and French (1993) suggests a shared story for several average-return anomalies. Specifically, positive exposures to RMW and CMA (returns that behave like those of the stocks of profitable firms that invest conservatively) capture the hig...

Variables with strong marginal explanatory power in cross-section asset pricing regressions typically show less power to produce increments to average portfolio returns, for two reasons. (1) Adding an explanatory variable can attenuate the slopes in a regression. (2) Adding a variable with marginal explanatory power always attenuates the values of...

The lending channel model posits that control of deposits that have reserve requirements allows the Fed to constrain the loans to businesses and consumers that are the comparative advantage of banks. The constraint works because banks do not use traded assets and liabilities with no reserve requirements to offset the effects of variation in deposit...

Open market rates take sustained swings away from the Federal funds target rate, TF, and on a day-to-day basis, open market rates do not converge to TF. These results document limits on Fed control of rates. The target rate, TF, tracks much of the long-term movement in rates, but the extent to which this is due to active Fed attempts to control rat...

A five-factor model directed at capturing the size, value, profitability, and investment patterns in average stock returns performs better than the three-factor model of Fama and French (FF 1993). The five-factor model’s main problem is its failure to capture the low average returns on small stocks whose returns behave like those of firms that inve...

At the 65th CFA Institute Annual Conference in Chicago (held 6–9 May 2012), Robert Litterman interviewed Eugene F. Fama to elicit his views on financial markets and investing.

I was invited by the editors to contribute a professional autobiography to the Annual Review of Financial Economics. I focus on what I think is my best stuff. Readers interested in the rest can download my vita from the Web site of the University of Chicago, Booth School of Business. I only briefly discuss ideas and their origins to give the flavor...

We examine three pairs of cross-section regressions that test predictions of the tradeoff model, the pecking order model, and models that center on market conditions. The regressions examine (i) the split of new outside financing between share issues and debt, (ii) the split of debt financing between short-term and long-term, and (iii) the split of...

In the four regions (North America, Europe, Japan, and Asia Pacific) we examine, there are value premiums in average stock returns that, except for Japan, decrease with size. Except for Japan, there is return momentum everywhere, and spreads in average momentum returns also decrease from smaller to bigger stocks. We test whether empirical asset pri...

The aggregate portfolio of actively managed U.S. equity mutual funds is close to the market portfolio, but the high costs of active management show up intact as lower returns to investors. Bootstrap simulations suggest that few funds produce benchmark-adjusted expected returns sufficient to cover their costs. If we add back the costs in fund expens...

I was invited by the editors to contribute a professional autobiography for the Annual Review of Financial Economics. I focus on what I think is my best stuff. Readers interested in the rest can download my vita from the website of the University of Chicago, Booth School of Business. I only briefly discuss ideas and their origins, to give the flavo...

The book-to-market ratio (B/M) is a noisy measure of expected stock returns because it also varies with expected cashflows. Our hypothesis is that the evolution of B/M, in terms of past changes in book equity and price, contains independent information about expected cashflows that can be used to improve estimates of expected returns. The tests sup...

We extend the evidence of Fama and French (1995) on the post-1962 profitability and equity financing of firms in different style groups (small versus big, value versus growth) to 1926-2006. The emphasis is on whether equity-financed investment varies with cashflows and price-to-book ratios in ways that support or violate the pecking order model of...

The anomalous returns associated with net stock issues, accruals, and momentum are pervasive; they show up in all size groups (micro, small, and big) in cross-section regressions, and they are also strong in sorts, at least in the extremes. The asset growth and profitability anomalies are less robust. There is an asset growth anomaly in average ret...

Average returns on value and growth portfolios are broken into dividends and three sources of capital gain: (1) growth in book equity, primarily from earnings retention, (2) convergence in price-to-book ratios (P/Bs) from mean reversion in profitability and expected returns, and (3) upward drift in P/B during 1927-2006. The capital gains of value s...

Four decades after its advent, the capital assets pricing model proposed by Nobel Prize laureate William Sharpe and by John Lintner, known as CAPM, remains the most widely used model in estimating fi rms' cost of capital and valuing portfolios. This is due to the model's predictive power for risk and risk-return ratios. The purpose of this article...

Migration of stocks across size and value portfolios contributes to the size and value premiums in average stock returns. The size premium is almost entirely generated by the small-capitalization stocks that earn extreme positive returns and thus become big-cap stocks. The value premium comes from (1) value stocks that improve in type because their...

We break average returns on value and growth portfolios into dividends and three sources of capital gain, (i) growth in book equity primarily due to earnings retention, (ii) convergence in price-to-book ratios (P/B) due to mean reversion in profitability and expected returns, and (iii) upward drift in P/B during 1927-2006. The capital gains of valu...

Valuation theory says that expected stock returns are related to three variables: the book-to-market equity ratio (B-t/M-t), expected profitability, and expected investment. Given B-t/M-t and expected profitability, higher expected rates of investment imply lower expected returns. But controlling for the other two variables, more profitable firms h...

We examine (1) how value premiums vary with firm size, (2) whether the CAPM explains value premiums, and (3) whether, in general, average returns compensate β in the way predicted by the CAPM. Loughran's (1997) evidence for a weak value premium among large firms is special to 1963 to 1995, U.S. stocks, and the book-to-market value-growth indicator....

We study how migration of firms across size and value portfolios contributes to the size and value premiums in average stock returns. The size premium is almost entirely due to the small stocks that earn extreme positive returns and as a result become big stocks. The value premium has three sources: (i) value stocks that improve in type either beca...

We combine elements of the pecking order and trade-off theories of capital structure to develop a more powerful and empirically descriptive theory in which firms have low long-run leverage targets, debt issuances are temporary deviations from target to meet unanticipated capital needs, firms rebalance to target with a lag despite zero adjustment co...

The evidence in Fama and Bliss (1987) that forward interest rates forecast future spot interest rates for horizons beyond a year repeats in the out-of-sample 1986–2004
period. But the inference that this forecast power is due to mean reversion of the spot rate toward a constant expected value
no longer seems valid. Instead, the predictability of th...

We examine (1) how value premiums vary with firm size, (2) whether the CAPM explains value premiums, and (3) whether, in general, average returns compensate β in the way predicted by the CAPM. Loughran's (1997) evidence for a weak value premium among large firms is special to 1963 to 1995, U.S. stocks, and the book-to-market value-growth indicator....

Standard asset pricing models assume that: (i) there is complete agreement among investors about probability distributions of future payoffs on assets; and (ii) investors choose asset holdings based solely on anticipated payoffs; that is, investment assets are not also consumption goods. Both assumptions are unrealistic. We provide a simple framewo...

Standard asset pricing models assume that (i) there is complete agreement among investors about probability distributions of future payoffs on assets, and (ii) investors choose asset holdings based solely on anticipated payoffs; that is, investment assets are not also consumption goods. Both assumptions are unrealistic. We provide a simple framewor...

Valuation theory says that expected stock returns are related to three variables: the book-to-market equity ratio (B/M), expected profitability, and expected investment. Given B/M and expected profitability, higher rates of investment imply lower expected returns. But controlling for the other two variables, more profitable firms have higher expect...

http:/ssrn.com/abstract=440920 First draft: August2003 Not for quotation

This issue of the Journal of Financial Economics contains the first set of studies in the new Clinical Papers section. The objective of this section is to provide a high-quality professional outlet for scholarly studies of specific cases, events, practices, and specialized applications. By supplying insights about the world, challenging accepted th...

The class of firms that obtain public equity financing expands dramatically in the 1980s and 1990s. The number of new firms listed on major U.S. stock markets jumps from 156 per year for 1973–1979 to 549 per year for 1980–2001. The characteristics of new lists also change. The cross section of profitability becomes progressively more left skewed, a...

We estimate the equity premium using dividend and earnings growth rates to measure the expected rate of capital gain. Our estimates for 1951 to 2000, 2.55 percent and4.32 percent, are much lower than the equity premium produced by the average stock return,7.43 percent. Our evidence suggests that the high average return for 1951 to 2000 is due to a...

We find that between 20 and 25 percent of the negative covariance between excess returns and inflation is explained by shocks to monetary policy variables. The finding is robust to changes in the monetary policy rule that have occurred during the 1966-2000 period. The result contradicts the theory that money supply shocks induce a positive correlat...

Characterizing the instantaneous investment opportunity set by the real interest rate and the maximum Sharpe ratio, a simple model of time varying investment opportunities is posited in which these two variables follow correlated Ornstein-Uhlenbeck processes, and the implications for stock and bond valuation are developed. The model suggests that t...

We examine a sample of 12,023 acquisitions by public firms from 1980 to 2001. The equally weighted abnormal announcement return is 1.1%, but acquiring-firm shareholders lose $25.2 million on average upon announcement. This disparity suggests the existence of a size effect in acquisition announcement returns. The announcement return for acquiring-fi...

After 1979, the rate at which new firms are listed on the major U.S. stock exchanges increases sharply, asset growth rates of new lists are high, but their profitability declines and remains low for at least five years after listing. New lists also become less likely to survive, primarily because of delisting for poor performance. Overall, market p...

We test the dividend and leverage predictions of the tradeoff and pecking order models. As both models predict, more profitable firms have higher long-term dividend payouts, and firms with more investments have lower payouts. Confirming the pecking order model but contradicting the tradeoff model, more profitable firms are less levered. Firms with...

The percent of firms paying cash dividends falls from 66.5 in 1978 to 20.8 in 1999. The decline is due in part to the changing characteristics of publicly traded firms. Fed by new lists, the population of publicly traded firms tilts increasingly toward small firms with low profitability and strong growth opportunities -- characteristics typical of...

There is a strong presumption in economics that, in a competitive environment, profitability is mean reverting. We provide corroborating evidence. In a simple partial adjustment model, the estimated rate of mean reversion is about 38% per year. But a simple partial adjustment model with a uniform rate of mean reversion misses rich nonlinear pattern...

The value premium in U.S. stock returns is robust. The positive relation between average return and book-to-market equity is as strong for 1929 to 1963 as for the subsequent period studied in previous papers. A three-factor risk model explains the value premium better than the hypothesis that the book-to-market characteristic is compensated irrespe...

We estimate the equity premium using dividend and earnings growth rates to measure the expected rate of capital gain. Our estimates for 1951 to 2000, 2.55 percent and 4.32 percent, are much lower than the equity premium produced by the average stock return, 7.43 percent. Our evidence suggests that the high average return for 1951 to 2000 is due to...

We estimate the internal rates of return earned by nonfinancial firms on (i) the initial market values of their securities and (ii) the cost of their investments, The return on value is an estimate of the overall corporate cost of capital. The estimate of the real cost of capital for 1950-96 is 5.95 percent. The real return on cost is larger, 7.38...

Diversified firms have different values than comparable portfolios of single-segment firms. These value differences must be due to differences in either future cash flows or future returns. Expected security returns on diversified firms vary systematically with relative value. Discount firms have significantly higher subsequent returns than premium...

The value premium in U.S. stocks returns is robust. The positive relation between average return and book-to-market equity (BE/ME) is as strong for 1929-63 as for the subsequent period studied in previous papers. Like others, we also find a size premium in stock returns. Small stocks have higher average returns than big stocks. The size premium is,...

Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreaction, and post-event continuation of pre-event abnormal returns is about as frequent as post-event rev...

Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreaction, and post-event continuation of pre-event abnormal returns is about as frequent as post-event rev...

This paper analyzes the survival of organizations in which decision agents do not bear a major share of the wealth effects of their decisions. This is what the literature on large corporations calls separation of "ownership" and "control." Such separation of decision and risk bearing functions is also common to organizations like large professional...

Suppose the ICAPM governs asset prices, and there are a total of S state variables that might be of hedging concern to investors. Can we determine which state variables are in fact of hedging concern? What does it mean to say that these state variables are priced, that is, that they give rise to special risk premiums in expected returns? The goal o...

A Re-examination of Some Popular Security Return Anomalies We re-examine the relation between stock returns, measures of risk, and a set of non-risk security characteristics, including the book-to-market ratio, firm size, the bid-ask spread, the stock price, the dividend yield, and lagged returns. Our primary objective is to determine whether these...

Estimates of the cost of equity for industries are imprecise. Standard errors of more than 3.0% per year are typical for both the CAPM and the three-factor model of Fama and French (1993). These large standard errors are the result of(i) uncertainty about true factor risk premiums and (ii) imp ecise estimates of the loadings of industries on the ri...

Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreac-tion, and post-event continuation of pre-event abnormal returns is about as frequent as post-event re...

The concept of multifactor portfolio efficiency plays a role in Merton's intertemporal CAPM (the ICAPM), like that of mean-variance efficiency in the Sharpe-Lintner CAPM. In the CAPM, the relation between the expected return on a security and its risk is just the condition on security weights that holds in any mean-variance-efficient portfolio, app...

We estimate that the average value of a dollar invested in the U.S. corporate sector is $1.18. When we delete utilities and current assets, where opportunities for value added seem limited, the estimate jumps to $1.68. We use cross-section regressions to study how value is related to dividends and debt. The regressions can potentially identify tax...

Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Because these patterns in average returns apparently are not explained by the CAPM, they are called anomalies. We find...

This paper uses a methodology robust to recent criticisms of standard long-horizon event study tests to show that bidders in mergers underperform while bidders in tender offers overperform in the three years after the acquisition. However, the long-term underperformance of acquiring firms in mergers is predominantly caused by the poor post-acquisit...

F OR MANY YEARS cconomists, Statisticians, and teach-ers of finance have been interested in developing and testing models of stock price behavior. One important model that has evolved from this research is the theory of random walks. This theory casts serious doubt on many other methods for describing and predicting stock price behavior — methods t...

This paper identifies five common risk factors in the returns on stocks and bonds. There are three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity. There are two bond-market factors, related to maturity and default risks. Stock returns have shared variation due to the stock-market factors, a...

ABSTRACT Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market {3, size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in {3 that is unrelated to size, the relation between market {3 an...

The one-year expected inflation rate and the expected real return on one-year bonds move opposite one another. The result is that the term structure shows little power to forecast near-term changes in the one-year interest rate, even though it shows power to forecast its components. When the forecast horizon is extended, interest-rate predictions i...

Expected returns on common stocks and long-term bonds contain a term or maturity premium that has a clear business-cycle pattern (low near peaks, high near troughs). Expected returns also contain a risk premium that is related to longer-term aspects of business conditions. The variation through time in this premium is stronger for low-grade bonds t...

The power of dividend yields to forecast stock returns, measured by regression R2, increases with the return horizon. We offer a two-part explanation. (1) High autocorrelation causes the variance of expected returns to grow faster than the return horizon. (2) The growth of the variance of unexpected returns with the return horizon is attenuated by...

There are time-varying term and default premiums in the expected returns on money market securities. Default premiums decline with maturity and tend to be higher during recessions. Term premiums tend to increase with maturity during good times, but humps and inversions in the term structure of expected returns are common during recessions. Treasury...

This paper analyzes investment rules for various organizational forms that are distinguished by the characteristics of their residual claims. Different restrictions on residual claims lead to different decision rules. The analysis indicates that the investment decisions of open corporations, financial mutuals and non-profits can be modeled by the v...

Negotiable certificates of deposit (CD's) trade in the capital market in competition with other securities like commercial paper and bankers' acceptances. If CD's must pay lenders competitive monetary interest, the reserve tax on CD's is borne by bank borrowers. Viability of the tax means there must be something special about bank loans that makes...

## Citations

... Check and balance mechanisms are embedded in Stakeholder Capitalism to equalize the power among stakeholders as well as the interests of shareholders and states are not above the interests of other stakeholders. Moreover, governments, industries, and nongovernmental organizations (NGOs) are supposed to be interested in achieving the Sustainable Development Goals (SDGs) (Clarke, 2020) in Stakeholder Capitalism through voluntary agreements and actions (Freeman and Phillips, 2002;Clarke, 2020;Fama, 2021), as well as by governmental policies and regulations (Perkin, 1996;Pieterse, 2003;Petrick, 2011;Oppong, 2020;Schwab and Vanham, 2021). The most important is that the assumption of Stakeholder Theory is bringing Abbreviations: ESG, Environmental, Social, and Governance. ...

... When the economy is good, the population earns more money and pays high taxes to the government. People spend more money on different items, thus eventually elevating VAT (Fama 2021). ...

Reference: Tax Revenue Measurement Using OWA Operators

... Hence, there is a research question if the common risk factors provide consistent prediction for stock return across different markets and areas of industry. The fact is that a good asset pricing approach must theoretically capture all the associated securities, irrespective of the portfolios or the individual stocks (Fama & French, 2020). Hence, in this study, we reassess the FF5 model based on the new emerging market of Bangladesh. ...

... Our themes-the dispersal of returns and the probability of loss over long prospects-are compatible for an expanded sample investigation. The present work in this capacity (Fama & French, 2018a, 2018b is grounded on the past US involvement and offers a convenient first phase, but the outcomes suffer from the survivor and informal data set. Our larger panel of past returns improves these apprehensions and provides an additional consistent description of tail results, which are of specific interest for enduring stakeholders. ...

... The authors also point out that board effectiveness is achieved through the ownership of a large proportion of outside directors. On this theme, Fama & Jensen (1985) find that the increase in bank value reflects the existence of independent non-executive directors on the board. The authors link this to the ability of these directors to properly monitor and safeguard the interests of different stakeholders. ...

... We underline that the regression specification in Equation (1) is relatively mainstream in the asset pricing literature, except for the difference (Δ) terms (see, e.g. Fama and French 2020). The coefficients measure the sensitivity of future returns to characteristics, or variations thereof. ...

... Consistently, for Australian stocks, Alaganar and Whiteoak (2004) find that the cross-sectional volatility of stock returns is associated with increases in sector volatility and reductions in cross-sector correlations. As an outcome of a bootstrapping exercise, whereby historical returns are assumed to represent unbiased estimates of the range of market outcomes over investment horizons, Fama and French (2018) have also demonstrated a relationship between market performance and the crosssectional dispersion of outcomes. ...

Reference: Stock market volatility: friend or foe?

... Harvey & Liu, 2018). This result is, however, not unique as the recent work of Fama & French (2018) also document a redundant market portfolio factor for some US models. ...

... The beta factor derived from global financial markets that is used to adjust for the riskiness of equity in estimating returns may no longer be fully appropriate from an empirical, i.e., econometric standpoint. Fama and French (1992) have long presented empirical evidence against the CAPM and its prediction of efficient markets, stating that the estimated beta, as commonly estimated, should not be used as the sole variable for explaining stock returns (see also Fama 2017). As such, alternatives or improvements in estimating equity-risk premium may have to be re-assessed, especially when considering water projects of LGUs located outside of the capital region, in much less developed areas. ...

... Tingkat profitabilitas merupakan salah satu faktor yang menyebabkan suatu perusahaan mengalami delisting. Fama and French (2004) mejelaskan bahwa perusahaan yang memiliki tingkat profitabilitas yang tinggi cenderung untuk memiliki resiko dan kemungkinan yang rendah mengalami delisting. Sebagaimana dalam Chaplinsky, S., & Ramchand, L. (2006) menjelaskan bahwa profitabilitas merupakan faktor yang menentukan sebuah perusahaan untuk dapat bertahan di pasar modal. ...