The Cross-Section of Expected Stock returns also possible, however, that BE /ME just captures the unraveling(regression rd the mean) of irrational market whims about the prospects of firms Whatever the underlying economic causes, our main result is straightfor- ward. Two easily measured variables, size(ME)and book-to-market equity BE/ME), provide a simple and powerful characterization of the cross-section of average stock returns for the 1963-1990 period In the next section we discuss the data and our approach to estimating 3 Section II examines the relations between average return and B and between average return and size. Section III examines the roles of E/P, leverage, and book-to-market equity in average returns. In sections IV and V, we summa rize,interpret, and discuss applications of the results Preliminaries A. Data We use all nonfinancial firms in the intersection of (a) the NYSE, AMeX, and NASDaQ return files from the Center for Research in Security Prices (CRSP) and(b) the merged COMPUSTAT annual industrial files of income- statement and balance-sheet data, also maintained by CrsP. We exclude financial firms because the high leverage that is normal for these firms probably does not have the same meaning as for nonfinancial firms, where high leverage more likely indicates distress. The CRSP returns cover NYSE and AMEX stocks until 1973 when NasdaQ returns also come on line. The coMPUSTAT data are for 1962-1989. The 1962 start date reflects the fact that book value of common equity(COMPUSTAT item 60), is not generally available prior to 1962. More important, COMPUSTAT data for earlier years have a serious selection bias; the pre-1962 data are tilted toward big histori cally successful firms To ensure that the ng variables are known before the returns they are used to explain, ch the accounting data for all fiscal yearends in calendar year t-1 ( 1962-1989)with the returns for July of year t to June of t +1. The 6-month(minimum)gap between fiscal yearend and the return tests is conservative. Earlier work (e. g, Basu(1983) often assumes that accounting data are available within three months of fiscal yearends. Firms are indeed required to file their 10-K reports with the sec within 90 days of their fiscal yearends, but on average 19. 8% do not comply. In addition, more chan 40% of the December fiscal yearend firms that do comply with the 90-day rule file on March 31, and their reports are not made public until April. (See Alford, Jones, and Zmijewski (1992).) We use a firm' s market equity at the end of December of year t-1 to compute its book-to-market, leverage and earnings-price ratios for t-1, and we use its market equity for June of year t to measure its size. Thus, to be included in the return tests for July of year t, a firm must have a CRSP stock price for December of year t-1 and June of year t. It must also have monthly returns for at least 24 of the 60 months preceding July of year t( for