Fig. 1. (a) Yearly cross-sectional regressions showing the common and incremental explanatory power of earnings and book values (stacked). In each year, three cross-sectional regressions are run. Price is regressed on (1) earnings, (2) book values, and (3) both earnings and book values. The incremental explanatory power of book values (lncr BV) is the explanatg£3 ~ power, R 2, from regression (3) less the R 2 from regression (1). The incremental explanatory power of earnings (Incr EARN) is the R 2 from regression (3) less the R 2 from regression (2). The explanatory power common to both earnings and book values (Common) is the remaining explanatory power.
Fig. 1 (b) Yearly cross-sectional regressions showing the total and incremental explanatory power of earnings and book values (unstacked). The total explanatory power (TOTAL) is the R z from the yearly cross-sectional regressions of price on both earnings and book values