TY  - JOUR
AU  - Pastor,Lubos
AU  - Veronesi,Pietro
TI  - Stock Valuation and Learning about Profitability
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8991
PY  - 2002
Y2  - June 2002
UR  - http://www.nber.org/papers/w8991
L1  - http://www.nber.org/papers/w8991.pdf
N1  - Author contact info:
Lubos Pastor
University of Chicago
Booth School of Business
5807 South Woodlawn Ave
Chicago, IL  60637
Tel: 773/834-4080
Fax: NA
E-Mail: lubos.pastor@chicagobooth.edu

Pietro Veronesi
University of Chicago
Booth School of Business
5807 South Woodlawn Avenue
Chicago, IL  60637
Tel: 773/702-6348
Fax: 773/702-0458
E-Mail: pietro.veronesi@chicagobooth.edu
AB  - We develop a simple approach to valuing stocks in the presence of learning about average profitability. The market-to-book ratio (M/B) increases with uncertainty about average profitability, especially for firms that pay no dividends. M/B is predicted to decline over a firm's lifetime due to learning, with steeper decline when the firm is young. These predictions are confirmed empirically. Data also support the predictions that younger stocks and stocks that pay no dividends have more volatile returns. Firm profitability has become more volatile recently, helping explain the puzzling increase in average idiosyncratic return volatility observed over the past few decades.
ER  -