Developing Fama and French Multi-Factor Pricing Model Using a Fundamental Factor Based on Accounting Characteristics

The purpose of the present research is to introduce a fundamental factor, based on related accounting characteristics (including earnings to price, book to price, sales growth rate, accruals, investment and growth in net operating assets), as a factor in the structure of Fama and French asset pricing model. The mentioned factor has been deducted from consumption theory and accounting principles and assumptions. In order to test the hypotheses, data of 345 companies listed in the Tehran Stock Exchange (TSE) and Iran Farabourse market, during the period 2006 to 2020, were used. To evaluate the performance of the multi-factor asset pricing model, test assets were ranked in two categories (once considering expected return characteristic, and once without considering the company’s expected return characteristic). In the following, using time series regression approach, the performance of augmented multifactor asset pricing models and corresponding conventional ones are compared. The results of this research showed that development of the research models with the fundamental factor based on mentioned accounting characteristics, can lead to improving the performance of these multi-factor models in explaining the variation in (expected) stock returns, and the test assets that considered the company’s expected return performed better compared to those that did not. The findings of this study indicate that the information in the financial statements has information content and can play an undeniable role in determining the expected return.