This paper presents a model of stock valuation that incorporates learning about average profitability. The market-to-book (M/B) ratio increases with uncertainty about average profitability, especially for firms that pay no dividends. M/B is predicted to decline over a firm's lifetime due to learning, with steeper declines for younger firms. These predictions are supported by empirical evidence. Data also show that younger stocks and no-dividend-paying stocks have more volatile returns. Recent increases in firm profitability volatility help explain the observed rise in average idiosyncratic return volatility over the past few decades. The model assumes that firm profitability reverts to an unknown mean, which investors learn over time. Using Bayesian updating, the paper derives a closed-form solution for the M/B ratio. M/B increases with expected profitability and decreases with expected stock returns, consistent with existing literature. The model shows that uncertainty about average profitability increases M/B, as it raises expected future payoffs without affecting the discount rate. The paper also considers the impact of external financing constraints on valuation. Dividend payouts reduce the growth rate of book equity, weakening the convexity between growth rate and future value of book equity. This implies that the relationship between M/B and uncertainty about profitability is stronger for no-dividend-paying stocks. Empirical analysis confirms the model's predictions on a large panel of data from 1963 to 2000. Younger firms have higher M/B ratios than older firms, with the relationship being stronger for no-dividend-paying firms. The results are statistically and economically significant, showing that M/B declines more steeply for younger firms. The paper also finds that age predicts future changes in M/B, with younger firms experiencing steeper declines. The model provides a rational explanation for high valuations of young firms without implying irrational investor behavior. It also shows that uncertainty about mean profitability leads to higher valuations due to increased expected future payoffs. The paper highlights the importance of learning about profitability in stock valuation and returns, and shows that uncertainty about profitability increases idiosyncratic return volatility. The model is robust to various modifications and extensions, and its implications are supported by empirical evidence.This paper presents a model of stock valuation that incorporates learning about average profitability. The market-to-book (M/B) ratio increases with uncertainty about average profitability, especially for firms that pay no dividends. M/B is predicted to decline over a firm's lifetime due to learning, with steeper declines for younger firms. These predictions are supported by empirical evidence. Data also show that younger stocks and no-dividend-paying stocks have more volatile returns. Recent increases in firm profitability volatility help explain the observed rise in average idiosyncratic return volatility over the past few decades. The model assumes that firm profitability reverts to an unknown mean, which investors learn over time. Using Bayesian updating, the paper derives a closed-form solution for the M/B ratio. M/B increases with expected profitability and decreases with expected stock returns, consistent with existing literature. The model shows that uncertainty about average profitability increases M/B, as it raises expected future payoffs without affecting the discount rate. The paper also considers the impact of external financing constraints on valuation. Dividend payouts reduce the growth rate of book equity, weakening the convexity between growth rate and future value of book equity. This implies that the relationship between M/B and uncertainty about profitability is stronger for no-dividend-paying stocks. Empirical analysis confirms the model's predictions on a large panel of data from 1963 to 2000. Younger firms have higher M/B ratios than older firms, with the relationship being stronger for no-dividend-paying firms. The results are statistically and economically significant, showing that M/B declines more steeply for younger firms. The paper also finds that age predicts future changes in M/B, with younger firms experiencing steeper declines. The model provides a rational explanation for high valuations of young firms without implying irrational investor behavior. It also shows that uncertainty about mean profitability leads to higher valuations due to increased expected future payoffs. The paper highlights the importance of learning about profitability in stock valuation and returns, and shows that uncertainty about profitability increases idiosyncratic return volatility. The model is robust to various modifications and extensions, and its implications are supported by empirical evidence.