The impact of corporate lifecycle on Fama-French three-factor model

From the Fama-French three-factor model, the expected stock return is a negative function of market value of equity (i.e., firm size), and also positive of book-to-market ratio. In this paper, we develop a discrete-time asset pricing model under a framework of the partial equilibrium and analyze how the corporate lifecycle impacts on the relationship between them. The results show that as firms become mature, the negative impact of market value of equity, which reflects the relative importance of growth options, on expected stock returns will weaken. In contrast, the positive relationship between the book-to-market ratio and expected stock returns is not changing over time. The theoretical analysis is supported by the empirical results of A-share listed firms from 1998 to 2016 in China.