Firm life expectancy and the heterogeneity of the book-to-market effect

I argue that the reason the book-to-market effect is stronger in small stocks is because smaller stocks generally have shorter life expectancy and therefore shorter equity duration. I build a model in which the book-to-market effect is stronger in stocks with shorter life expectancy. Empirically, I use delisting probability as my proxy for life expectancy. The data support my model's central prediction and its additional implications for stock return and variance. My results provide a rational explanation for the heterogeneity of the book-to-market effect, evidence previously taken as support for behavioral explanations.