Corporate equity performance and changes in firm characteristics

Brian Blank and Cole McLemore

Abstract

While prior equity performance research analyzes portfolio characteristics using multifactor models, portfolio groups are typically used to explain average returns. Instead, we explore annual firm-level data and compare this with annual percentage changes in firm characteristics, emphasizing model predictive power and individual variation. Our analyses show a significant link between individual firm equity returns and percentage changes in total assets, book-to-market ratios, current ratios and shares outstanding, as well as historical returns and average market returns. Our findings affirm prior work illustrating the importance of profitability, size, liquidity, momentum and market returns, although we observe minimal evidence of the importance of investment in capital expenditures. We also perform these analyses at the industry level and note differences across industries, including the cyclical nature of the business equipment and consumer durables industries in contrast to the utilities and energy sectors. Overall, we contribute to the understanding of corporate characteristics and equity performance.