Recent studies indicate that earnings and book values are important factors in explaining stock prices. This paper uses the work of Burgstahler and Dichev (1997), which used a model based on option pricing theory and concluded that stock prices are convex functions of profits when book values are kept constant and stock prices are a convex function of book values when earnings are constant. Using an adapted methodology and applying on a sample of stocks traded on the Brazilian market, the tests realized through a comparison of two portfolios with high and low price-to-book ratio supported the hypothesis, as expected.
valuation; option pricing; residual income
