The P/B Ratio : Level Versus Change

This study sheds a new light on the role of the change in price-to-book ratio (PB) relative to the level of price-to-book (P/B) ratio in predicting stock performance. A simple portfolio return analysis shows that the PB is a more effective investment heuristic than the P/B ratio. The contemporaneous panel regression with fixed and random effects discloses that both the PB and the P/B ratio are positively and significantly related to stock returns. The proxy panel regression with fixed and random effects holds that the P/B effect becomes contrarian, while the PB effect remains positive.