Evolution ofother fundamentals also

Evolution ofother fundamentals also conditions assignation to Fama–French portfolios. Figure 2 plots the evolution of ln(size) prior to and subsequent toportfolio formation. The average market values of low b/m firms (S/L and B/L) increase significantly prior to portfolio formation. These low b/m firms are also the ones that appear to be accelerating investment, as seen in Figure 1. If size is a measure ofgrowth opportunities, as Berk, Green, and Naik argue, low b/m stocks seem to be exercising investment options around year 0. Alternatively,size may be an inverse measure of risk, in which case the risk oflow b/m stocks decreases (size increases) prior to portfolio formation, particularly for large firms. Although not shown, we also examine the evolution of b/m according to whether we assign stocks to high, medium, or low investment-growth portfolios. High and medium investment-growth firms show declining b/m prior to portfolio formation year, while low investment-growth firms show a rise in b/mthat peaks just prior to the year of portfolio formation.