Explaining the cross-section of UK expected stock returns

Norman C. Strong, Xinzhong G. Xu

Research output: Contribution to journalArticlepeer-review


We examine the cross-section of expected returns for UK equities. For the period 1973-1992, we test for a relationship between expected returns and market value, book-to-market equity, leverage, earnings-price ratio, and beta. In simple regressions, we find average returns significantly positively related to β, book-to-market equity and market leverage, and significantly negatively related to market value and book leverage. However, when we include either market value or any accounting based variables along with β, the latter becomes insignificant. Either book-to-market equity or leverage variables also cause market value to become insignificant. We conclude that either book leverage and market leverage or book-to-market equity are the only consistently significant variables for average returns. However, the explanatory power of any combination of variables for average returns is low. We provide a complete analysis of the relation of average return to beta and market value for the period 1960-1992. This analysis confirms the results on β and market value for the shorter period. © 1997 Academic Press Limited.
Original languageEnglish
Pages (from-to)1-23
Number of pages22
JournalBritish Accounting Review
Issue number1
Publication statusPublished - Mar 1997


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