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Many researchers have documented that stocks'' excess
returns, afteradjusting for the market risk by the CAPM, are
positively related to thebook-to-market ratios. Some
researchers [Fama and French 1992,1995] arguedthat those firms
with high book-to-market ratios were expected to have
lowerreturns on capital than those firms with low book-to-market
ratios. Buyingstocks that have high book-to-market ratios, due
to these distressed firmsbeing more sensitive to economic
conditions, tend to have higher risk. Thehigher excess returns
are simply a compensation for this risk which is notaccounted
for by the traditional CAPM. However, some researchers have
raisedalternative explanations for this CAPM anomaly. For
example, Dreman and Berry(1995) proposed a mispricing-correction
hypothesis, stated that the differingreturns for different book-
to-market stocks may result from a correctivereeaction to
significant mispricing. The empirical research is conducted
first to determine whether excessreturns are found for high
book-to-market stocks, by using the market mode toto adjust for
systematic risk. Second, we are to examine whether the
excessreturn are related to the earnings prospects of the firms,
or from the marketmispricing. The major findings of this
research presented are:1. A significant positive excess returns
are found for high book-to-market stocks, by using marketmodel
to adjust for systematic risk. 2. Firms with high book-
to-market ratios do not possess poorer earnings prospects than
those of firms with low book-to-market ratios. 3. Differing
returns for different book-to-market stocks are not result
from differing risk of those firms.
4. The results presented in this research is found to be
consistent with mispricing correction, and investors tend to
overreact in Taiwanese stock market.
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