The paper investigates the relationship between stock returns and beta, firm size, book-to-market equity ratio and earnings-price ratio in the Iranian stock market using the Fama and French (1992) methodology following the Dimson’s (1979) approach for estimating beta. Similar to previous studies in Iran, US and UK stock markets, the study finds that beta is unable to explain the average monthly returns on stocks listed in Tehran Stock Exchange for the period 1997-2004. However, three accounting variables, firm size, book-to-market equity and earnings-price ratios seem able to capture the cross-sectional variation in average monthly returns over the period under study. It seems that a three factor model, ln(ME), ln(BE/ME), and E/P, is more appropriate for the description of asset pricing behavior in Iranian emerging stock market namely TSE.
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