Resumen
Ali et al. (2003) argue that the Book-to-Market (B/M) anomaly is explained by mispricing. Using firm-level data from 1976 through 1997, we replicate their results and then test the idea that the anomaly is also explained as reflecting compensation for risk due to heterogeneous expectations (?opinion divergence?). The proxy for opinion divergence is unexpected trading volume, as used by Garfinkel and Sokobin (2006). We show that the B/M effect increases with opinion divergence. We also empirically test the argument advanced by Varian (1985), and find support for the compensation-for-risk to the B/M-based portfolio returns view, as suggested by Fama and French (1992, 1993, 1997). Keywords: Opinion divergence, arbitrage risk, book-to-market