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Value Versus Growth Stocks: Book-to-Market, Growth, and Beta
... But there are conflicting risk relationships at least with beta. Capaul, Rowley and Sharpe (1993) find a negative relationship between B/M and beta, while Harris and Marston (1994) control for growth and find a positive relationship between B/M and beta. This contradictory evidence does little to illuminate the connection between risk, return, and growth illustrated by the constant growth valuation model Second, LSV conclude that the behavior of individual and institutional investors causes the value/growth investment phenomenon. ...
... This explanation of mis-pricing is not universally supported. Harris and Marston (1994) find that mis-pricing is not a valid explanation for the value/growth investment puzzle since portfolios based on differences in analysts' growth expectations have no return advantages. In contrast, Dechow and Sloan (1997) find evidence of mean reversion and the incorporation of analysts' growth expectation biases. ...
Stocks with a high valuation compared to fundamental values imply a high growth rate, yet these stocks have typically under-performed in subsequent years supporting Lakonishok, Shleifer and Vishney's (1994) contrarian investment strategies. The precise definition of growth and subtle differences of measuring growth are explored in assessing the role of growth in long-term investment decisions and stock valuation. Results from a later period and with additional tests than employed by LSV indicate that growth is a primary valuation factor, and valuation measures such as E/P and B/M, are imperfect proxies for expected growth. Growth appears mean reverting, but investors do not seem able to discern changes in growth rates and this miss-specification of expected growth may help explain the superiority of value versus growth strategies. In addition, investors' naïve extrapolations of past growth provide explanatory power in future holding period returns.
... Penman (1995) 3. In der Literatur wird sowohl das Buchwert-Marktwert-Verhältnis, wie auch das Marktwert- Fama & French (1992) und Fama & French (1993) stellen in ihrer Untersuchung für die Jahre 1963-1990 für die NYSE, die AMEX sowie die NASDAQ einen signifikanten Zusammenhang zwischen dem Buchwert-Marktwert-Verhältnis und der durchschnittlichen Aktienrendite fest. Harris & Marston (1994), Daniel & Titman (1997) Rosenberg et al. (1985) und Wallmeier (2000 beobachten einen starken Marktwert-Buchwert-Effekt und schließen aus ihren Ergebnissen, dass der Markt ineffizient ist. Während Rosenberg et al. (1985) auf eine theoretische Erklärung für diese Schlussfolgerung verzichten 7 , ordnet Wallmeier (2000) die These der Ineffizienz der APT 5. Vgl. ...
... Andere Darstellungen für den Einfluss des Buchwertes auf den Marktwert eines Unternehmens finden sich bei Damodaran (2001), Harris & Marston (1994) und Richter & Herrmann (2002). Die genannten Autoren entwickeln auf der Grundlage des Wachstumsmodells von Gordon (1955) ...
... Book to market and cash flow yield had the most significant and reliable correlation with the stock returns. Harris and Marston (1994) found that the book to market and beta related inversely to each other. Also the forecasted growth and beta positively correlated. ...
Financial variables are useful indicator for future stock returns. In the USA market during the period of 1963-90the book to market value and firm size have more explanatory power for future stock returns. But some studies argue that sales to price ratio and debt to equity explain future stock returns better than the book to market value and firm size. The main objective of this study is to see which financial variable explains stock returns better than the others. In this study the four financial variables debt to equity, book to market value of equity, firm size and sale to price are used. The study includes 26 companies from pharmaceutical and chemical sector in Pakistan and listed on the Karachi Stock Exchange. The regression technique is used to see the relationship between stock returns and financial variables. We find that the best indicator for stock returns in Pakistani stock market is book to market value of equity for the studied period 2000-2009.
... The marketto-book value (MTB) of restaurants was selected as the dependent variable on the grounds that market value likely reflects the performance and status of an organization, which could be linked with its sustainability [33][34][35]. The book value, which has been frequently used as a financial performance indicator (e.g., return on assets (ROA)), can be limited to past performance, but market-to-book value is a more future-oriented performance indicator that reflects both the internal status of a business as well as external environmental conditions, such as economic conditions, interest rates, and supply and demand [36][37][38][39][40]. The KLD index and social rating data, which are commonly found in the literature for measurement of CSR [1,2,11], were used as the independent variables. ...
The main goal of this study was to investigate the association between corporate social responsibility (CSR) and the value of restaurant firms by employing triple bottom line theory, a framework for a business model of sustainable development focusing on profit, environment, and people rather than just maximizing profit. Even though triple bottom line has been a common theoretical foundation in the CSR area, there is sparse literature on the theory in the context of CSR in the restaurant domain. Data regarding CSR dimensions and market-to-book value from 32 publicly traded restaurant firms in the US stock market for the period 1999–2012 were gathered, and panel data analysis methods of ordinary least square, one-way fixed effect, and time series feasible generalized least square were employed. The results revealed that economic CSR enhanced restaurant value, whereas environmental CSR diminished the value. The theoretical contribution of this study is that it will broaden the scope of triple bottom line theory. The results of the study will help restaurant administrators determine CSR policy.
... 154). Moreover, Harris and Marston (1994) argued that after adjusting for growth, they found positive association between B/M and beta. Their empirical findings indicated that high beta would raise the required rate of return by risk-averse investors that eventually would depress stock price and lead to high BM ratio (p. ...
A book chapter reviews the theoretical literature on the effect of macroeconomic variables on stock prices. More specifically, there are basic theories that have been contributed to explore importance of macroeconomic variables in analyzing behavior of stock prices. This section describes four main theories namely, rational valuation theory, the efficient market theory, portfolio theory, and asset pricing theory.
... Further this finding is confirmed by Grinold (1993), Davis (1994), He and Ng (1994), Fama and French (1995 and Javid and Ahmad (2008) in addition to numerous other studies. On the other hand there is considerable counter evidence that supports beta to explain risk return relationship such as Black (1993), Bhardwaj and Brooks (1993), Harris and Marston (1994), Pettengill, Sundaram, and Muthar (1995), Kothari, et al. (1995) and Clare, et al. (1998). Fabbozi and Francis (1978) and Levy (1974) extend CAPM by computing separate betas for bull and bear markets to test for the instability of beta and the validity of the return-beta relationship. ...
This study investigates the dynamics of beta by the asymmetric response of beta to bullish and bearish market environment on 50 stocks traded in Karachi Stock Exchange during 1993-2007. The results show that the betas increase (decrease) when the market is bullish (bearish). The results however suggest that investors receive a positive premium for accepting down-side risk, while a negative premium is associated with up-market beta. The results suggest that the conditional Fama and French three factor model has performed better than the conditional CAPM when news asymmetry was taken into account compared with the unconditional Fama and French three factor model and the unconditional dual-beta CAPM in explaining the relationship in beta and returns in case of Pakistani market. JEL classification: G12, G15 Keywords: Beta Instability, High Market Beta, Low Market Beta, EGARCH Model, News Asymmetry, Fama and French Three Factor Model
... Haugen (1997) analyzes several studies on market overreaction to company announcements and finds that value stocks are frequently undervalued. Previous research shows that value strategies tend to outperform the market in the long term (Nicholson 1960;Ambachtsheer 1977;Basu 1977;Ambachtsheer and Farrell 1979;Estep et al. 1983;Sorensen and Williamson 1985;Harris and Marston 1994;Chan et al. 1996). Fama and French (1992 conclude that higher returns associated with value strategies can be attributed to higher risk than other strategies. ...
Since 1997, CFO Magazine has published a ranking of 1000 companies in its “Working Capital Scorecard.” Our research explores the question as to whether working capital management practices based on the accounting metrics used by CFO Magazine serve as a basis for investor-based strategies for superior return generation. We examine the stock performance of top ranked companies from 1997 to 2012 against benchmark portfolios. Controlling for market, market capitalization, book to market, momentum factors, liquidity factors, and corporate governance; the higher ranked firms produce statistically higher excess returns than bottom ranked firms. In bull market periods, firms with superior working capital management outperformed their counterparts on a raw and risk-adjusted basis. These top ranked firms also provide statistically significant active returns regardless of market cycle. In sum, our results indicate that shareholders reward firms with superior working capital management strategies with higher raw and risk-adjusted performance over longer holding periods across the economic cycle especially in bear markets cycles.
... We considered shifts from higher to lower book-to-market ratio as well as from larger-cap to smaller-cap stocks. Stocks with low book-to-market ratios (i.e., growth stocks) are generally more risky than those with higher book-to-market ratios because they have a high expectation of future growth and reveal a higher positive correlation with market beta (Harris and Marston, 1994). Similarly, small-cap stocks have been associated with higher risk than large-cap stocks (Banz, 1981;Kempf, Ruenzi, and Thiele, 2009). ...
Using data on 3,225 actively managed U.S. mutual funds from 1980 to 2006, we test hypotheses designed to disentangle risk and change as outcomes of behavioral performance feedback routines. We theorize that managers make decisions involving risk and decisions involving change under different conditions and motivated by different concerns. Our results show internal social comparison across units within a firm will motivate risk, whereas external social comparison across firms will motivate change. When a fund experiences a performance shortfall relative to internal social comparison, the manager is likely to make decisions that involve risk because the social and spatial proximity of internal comparisons trigger individual concern and fear of negative individual consequences, such as job loss. In contrast, when a fund experiences a performance shortfall in comparison with external benchmarks, the manager is more likely to consider the shortfall an organizational concern and make changes that do not necessarily involve risk. Although we might assume that negative performance in comparison with both internal and external benchmarks would spur risky change, our results indicate that risky change occurs most often when a decision maker receives unfavorable internal social performance feedback and favorable external social performance feedback. By questioning assumptions about why and when organizational change involves risk, this study begins to separate change and risk outcomes of the decision-making process.
... Many academic studies find that firms with high ratios of book value of equity to market value of equity (B/MV) experience abnormally high stock returns (Rosenberg et al., 1985;Fama and French, 1992;Capaul et al., 1993;Harris and Marston, 1994). Fama and French (1993) suggest that high book-to-market ratios identify firms undergoing significant financial distress. ...
... We considered shifts from higher to lower book-to-market ratio as well as from larger-cap to smaller-cap stocks. Stocks with low book-to-market ratios (i.e., growth stocks) are generally more risky than those with higher book-to-market ratios because they have a high expectation of future growth and reveal a higher positive correlation with market beta (Harris and Marston, 1994). Similarly, small-cap stocks have been associated with higher risk than large-cap stocks (Banz, 1981;Kempf, Ruenzi, and Thiele, 2009). ...
... The question why the value-growth dichotomy could relate to stock returns remains unclear as existing studies do not unanimously agree on what Market-to-Book value ratio actually measures. Harris and Marston (1994) suggest that growth and beta are part, but not all, of the book-tomarket (Market-to-Book) puzzle. ...
What determines stock returns?" Although the answer to this question has been much sought by researchers and investors, most studies to date are empirical in nature and provide a very limited view of the problem. The general findings are that certain firm characteristics do have an affect stocks returns. Among these characteristics, the popular ones studied include market-to-book value ratio, size, and price-earning ratio. However, many studies have found these characteristics to have a negative relationship with stock returns. Nonetheless, some researchers show that market-to-book value has stronger explanatory power than others in specific markets. All in all, there is no consensus on which single or combination of characteristic(s) best explain stock returns universally, leaving interested academics and investors to find out which research settings are best proxies for their situations and which characteristics should be taken into consideration.
... Although there has been no research regarding the valuation of banks for Turkish banking sector there has been numerous research investigating the market value to book value ratios for banking sector and other sectors in different countries. Harris and Marston (1994) find that there is a positive relationship between the beta of a stock and its market value to book value ratio. They also find that growth plays a more important role than beta in explaining the market value to book value ratios. ...
... They find changes in quarterly earnings as one of the driving variables predicting the potential for excess returns. Similarly, Harris and Marston (1994) find it necessary to control for earnings prospects to predict excess returns. ...
Recent studies have uncovered several systematic patterns that increase the probability that individual investors can select stock portfolios with excess returns. This study tests the feasibility of using a commercially available computerized stock screening program for investors to take advantage of these patterns. The screening program searches the three major exchanges and selects stocks on both fundamental and technical indicators: low price-to-sales ratio, small firm size, accelerating stock prices above their 50 day moving average, high trading volume, and high earnings growth. Of the 18 models tested between 1994 and 1998, those that allow for selection between exchanges yield portfolio returns that significantly exceed the average market indices. © 1999 Elsevier Science Inc. All rights reserved.
The objective of this paper is to reveal the link between taxation of Tunisian companies and their capital structure. We investigate whether Tunisian managers adjust the level of company‘s indebtedness in response to a decrease in the corporate tax rate. We used panel data of Tunisian year-firm observations. Two study periods- those pre-reform (2004-2005) and after-reform (2007-2008)- were undertaken to investigate the impact of tax reform on the level of corporate debt. Our empirical results suggest that tax factors play an important role in determining the ratio of corporate debt. It appears that the Tunisian companies reduce the level of debt after the tax reform, in response to the decrease in the corporate tax rate. A reduction in tax rates by 5 percentage points (from 35% to 30%) leads firms to reduce from 5.5% to finance their assets by debt.
Systematic risk, or beta, measures stock price variability in the overall stock market. A considerable body of literature focuses on estimating beta. To the best of our knowledge, there is, however, a lack of definitive research on the impact of income elasticity of demand on stock market beta. This study is the first to examine this relationship using 659 publicly traded firms from 47 industries in South Korea from 2001 to 2020. To estimate the value of the stock market beta, we employ an econometric model with a fixed effects‐two stage least squares approach and use industry concentration as an instrumental variable to deal with the endogeneity problem in the estimation. The overall objective of this study is to investigate the influence of income elasticity of demand on stock market beta.
This paper studies the impact of a change in promoter shareholding on small-cap-value stocks. NIFTY Small Cap 250 index stocks within the top 20th percentile of the book-to-market (B/M) ratio of the same universe have been considered for this study. The paper uses regression analysis for understanding the impact of independent variables on returns. The universe is further narrowed down to stocks with a positive change in promoter shareholding, which is found to be negatively related to stock returns. In addition, although the book-to-market ratio does not play any role in the prediction of returns while within this narrowed-down universe, the size effect is present. The results are discussed with reference to some relevant past research literature, and the scope for further research is also discussed.
This paper examines how the short‐sales constraints on stocks affect the pricing of firm characteristics—size, book‐to‐market ratio, liquidity, earnings‐to‐price ratio and dividend yield. Using a unique feature of Hong Kong regulations on short selling that, at each point of time, only a designated list of stocks can be sold short, we find that stocks not allowed to be sold short have higher adjusted returns, exhibit more prominent size effect and offer higher compensation for lagged illiquidity than stocks that can be sold short. The results also indicate that the presence of both short‐sales constraints and opinion dispersion would cause contemporaneous returns to rise and future returns to fall by more than those caused by the opinion dispersion only. Practically, when financial analysts evaluate the stocks, or fund managers construct their trading strategies based on some financial anomalies, the shortability of the assets has to be a very important factor to be considered.
Several studies have documented a significant relationship between Market-to-Book ratio (MV/BV) and ROE especially when the sign of ROE is taken in consideration. This study aims to investigate the association between decomposing ROE to its main components (which are; Net Profit Margin (NPM), Total Asset Turnover (TAT) and Equity Multiplier (EM)) and MV/BV for a sample of firms listed on Amman Stock Exchange in Jordan during the period (2000-2009). Using pooled and cross-sectional regressions, the results show that the explanatory power dropped significantly after decomposing ROE. However, the relationship is improved slightly when taking the sign of NPM into consideration. The study also examines the effect of three control variables on the association under examination; the sector to which the firm belongs, the firm size, and change in GDP. When decomposing ROE; the association improved for large industrial firms when the change in GDP was high, and when distinguishing between positive and negative NPM.
In einem Cashflow-Modell lässt sich der innere Aktienwert anhand der prognostizierten Cashflows, der Wachstumsrate und der erwarteten Rendite (bzw. Risiko) bestimmen. In einer relativen Bewertung hingegen wird der Aktienwert auf der Basis von vergleichbaren, auf dem Markt gehandelten Aktien durch einen Multiplikator festgelegt. Grundsätzlich unterscheidet man zwischen Preis- und Wertmultiplikatoren. Bei einem Preismultiplikator wird der Aktienpreis zu einer finanziellen Variablen, die einen maßgebenden Einfluss auf den Aktienpreis hat, ins Verhältnis gesetzt. Die hierzu gewählte Variable ist zum Beispiel der Gewinn oder der Buchwert je Aktie. Im Gegensatz dazu wird bei einem Wertmultiplikator der Marktwert des Gesamtkapitals durch eine finanzielle Variable des Gesamtunternehmens wie etwa das EBITDA, den Umsatz oder den frei verfügbaren Cashflows dividiert. Mithilfe der Preis- und Wertmultiplikatoren lässt sich feststellen, ob die Aktie auf dem Markt richtig bewertet ist.
Dividend-yield strategies generate investor interest because they have historically offered better risk-adjusted performance. We test the performance the Dogs of the Dow (DoD) strategy, one of the most prevalent dividend-yield strategies, using Fortune’s Most Admired Companies (MAC) by comparing the performance of a top 10% dividend-yield MAC portfolio (MAC Dogs) to the returns on the Dow Jones Industrial Average (DOW), the standard DoD strategy, and two benchmarks (the overall MAC portfolio and the S&P 500 Index). We find that the MAC Dogs provide significantly higher raw returns than both the DOW and the standard DoD strategy. Moreover, the MAC Dogs provide significantly higher raw and risk-adjusted returns against our benchmarks. Our results remain robust when using either alternative dividend-yield cutoff points or alternative event windows surrounding the issue dates for Fortune. Finally, we show that the average monthly returns are higher for the MAC Dogs than for either benchmark regardless of positioning in an economic cycle. Our results contribute to the existing DoD literature by expanding the strategy beyond application to traditional indexes. Specifically, we use a unique and replicable grouping of stocks based on MAC and offer support for a link between financial and social performance.
The main purpose of the present study is to suggest a theoretical framework for empowerment from the Quranic and contemporary perspectives in order to identify similarities between them, and demonstrate the dominance of the Islamic thought and applicability irrespective of time or place. The qualitative approach was adopted for analysis and inference implication. Major conclusions included that:
1. Empowerment as a concept is relatively new in the contemporary management thought; and has become in focus in response to market challenges and competitions. In comparison, empowerment in the Islamic thought is a constant principle that was not developed as a result of any challenge, market demand, or profit orientation; rather empowerment was emphasized from the Islamic perspective to instill the humane and spiritual values and establishing the rights of individuals values of justice. By instilling the ethics of truthfulness, honesty, sincerity and other humanistic values, the Islamic approach targets more disciplined and well-behaved humans who perform good deeds for Allah that finally will help building the community and trust with others.
2. Empowerment as a concept in both the Quranic and contemporary approaches of thought relates with the scope of freedom and giving power by the upper level managers to lower level employees to practice their jobs effectively and become partners in work.
3. The practice of empowerment results in outcomes that have positive effects on the stakeholders involved.
4. The Islamic perspective emphasized on the practical aspects of empowerment rather than theoretical, contrary to the contemporary perspective. This study demonstrated that empowerment as a concept was known and practiced in the Islamic thought for many centuries ago; and the theorization about empowerment in the contemporary administrative thought is not new, although it contributed to greater sharpness and remolding of the related Islamic concepts.
Die Unterscheidung zwischen Wachstumsunternehmen und klassischen Unternehmen ist keine Errungenschaft der 1990er Jahre, sondern eine traditionelle Unterscheidung. Die Termini “Old” und “New Economy” hingegen sind ein Phänomen der 90er. Heute weiß man jedoch, neuen ökonomischen Gesetzmäßigkeiten folgt die “New Economy” nicht. Nach den vielen Insolvenzen von jungen Unternehmen in den Jahren 2000 und 2002, die man in den damaligen Wachstumsbranchen beobachtet hat, sind lediglich einige wenige „Sterne“ unter den Wachstumsunternehmen geblieben. In Deutschland wurde im Januar 2003 ein ganzes Marktsegment abgeschafft, an dem Wachstumswerte gehandelt wurden: der vormals sehr erfolgreiche „Neue Markt“.
Vor dem Problem der Bewertung von Unternehmen stehen in der Praxis insbesondere Venture Capital-Gesellschaften, Unternehmensentwickler in Großunternehmen und Investmentbanken, die den Börsengang begleiten und einen Emissionskurs festlegen müssen. Angesichts der geschilderten Prognoseprobleme bei der Anwendung der traditionellen Methoden und eines stark schwankenden Bewertungsniveaus an Kapitalmärkten wie der NASDAQ oder dem Neuen Markt nehmen Praktiker gerne relative Unternehmensbewertungen vor. Sie ermitteln den Wert eines Wachstumsunternehmens also durch den Vergleich bestimmter Kennzahlen mit ähnlichen, bereits börsennotierten Unternehmen (vgl. Perlitz/Seger/ Ackermann 1999) oder durch den Vergleich mit Transaktionen, bei denen ähnliche Unternehmen oder Teile von Unternehmen verkauft wurden.
Wachstumsunternehmen sind nicht erst ein Phänomen des Internet-Zeitalters, ihre Bewertung beschäftigt Investoren und Forscher schon seit geraumer Zeit. Wie der Begriff bereits besagt, handelt es sich dabei um Unternehmen, die ihren Wert eher aus ihrem rasanten Wachstum und weniger aus ihrer Fähigkeit zur Generierung zeitnaher Zahlungsströme schöpfen. Während die Theorie der Unternehmensbewertung grundsätzlich für alle Unternehmenstypen gleich ist, wurden doch spezielle Modelle entwickelt, die auf die Bewertung von schnell wachsenden Unternehmen angepasst sind. Neben den Realoptionsmodellen gehört das Modell von Schwartz und Moon (2001) zu den weiter verbreiteten Ansätzen. Im Rahmen dieses Kapitels werden wir näher auf dieses Modell eingehen, seine Methodik beschreiben und erörtern, inwiefern es sich speziell zur Bewertung von Wachstumsunternehmen eignet.
In Deutschland ist eine mit anderen Ländern vergleichbare Aktienkultur erst sehr spät entstanden. Genau genommen ist sie im internationalen Vergleich auch heute noch zurückhaltend. 18% aller deutschen Haushalte hielten im Jahr 2000 Aktien, verglichen mit 25% in den USA und Großbritannien sowie 35% in Schweden. Dennoch kann nicht geleugnet werden, dass die Einstellung der Deutschen zu Aktien offensiver geworden ist. Nicht zuletzt wird dies durch den trotz aller Probleme doch beeindruckenden Erfolg des Neuen Markts in Frankfurt deutlich. Der Neue Markt ist heute sicherlich die wichtigste Wachstumsbörse in Europa, was natürlich auch auf die Bereitschaft der Anleger zurück zu führen ist, dort Mittel zu investieren.
In einem Cashflow-Modell lässt sich der innere Aktienwert anhand der prognostizierten Cashflows, der Wachstumsrate und der erwarteten Rendite (bzw. Risiko) bestimmen. In einer relativen Bewertung hingegen wird der Aktienwert auf der Basis von vergleichbaren, auf dem Markt gehandelten Aktien durch einen Multiplikator festgelegt. Grundsätzlich unterscheidet man zwischen Preis- und Wertmultiplikatoren. Bei einem Preismultiplikator wird der Aktienpreis zu einer finanziellen Variablen, die einen maßgebenden Einfluss auf den Aktienpreis hat, ins Verhältnis gesetzt. Die hierzu gewählte Variable ist zum Beispiel der Gewinn oder der Buchwert je Aktie. Im Gegensatz dazu wird bei einem Wertmultiplikator der Marktwert des Gesamtkapitals durch eine finanzielle Variable des Gesamtunternehmens wie etwa das EBITDA, den Umsatz oder den frei verfügbaren Cashflows dividiert. Mithilfe der Preis- und Wertmultiplikatoren lässt sich feststellen, ob die Aktie auf dem Markt richtig bewertet ist.
Fifty years of intensive search have yet to identify scientifically useful non-linear utility functions. Even complex functions with many free parameters do a poor job of predicting individual behavior in out-of-sample data, in new tasks and in new contexts. At the population level, socioeconomic and demographic data exhibit little power to explain variations in the curvature of estimated utility functions (risk preferences). There is no consensus even on the cross-sectional distributions of risk preference parameters. Qualitative accounts of macroeconomic phenomena, financial markets, insurance, and gambling, the traditional justifications for non-linear utility functions, have not led to quantitative work of practical value. The absence of scientifically useful evidence on curved utility functions suggests the merits of returning to the roots of choice theory. Placing the explanatory burden on potentially observable opportunity sets offers a simpler and more robust approach to understanding behavior under risk. Analysis of net payoff opportunities, including embedded options and other interactions with existing obligations, permits a parsimonious analysis of risky choice using only expected value, i.e., a linear utility function.
This study estimates the significance of price-to-book, price-to-earnings, and market size as determinants of equity returns of 21 emerging equity markets over 1991–2000. Cross-sectional data indicate the significance of the P/BV ratio and market size, but pooled data results show the significance of only P/BV; these findings are similar to results in developed markets. Additional estimates confirm the insignificance of P/E ratio, thus proving the P/BV is a better predictor of equity returns. This study provides further insight into the discussion on the choice between P/BV and P/E.
This paper decomposes the cash component of earnings and analyzes persistence characteristics and pricing implications of various subcomponents, with particular attention on changes in cash. Changes in underlying fundamentals might dictate changes in cash to new optimal levels. Alternatively, suboptimal changes in cash might result from agency costs allowing managers’ actions to diverge from the best interests of shareholders. We predict and find that both suboptimal increases and decreases in cash bode poorly for future earnings. In fact, we find that suboptimal increases (decreases) in cash have less (greater) persistence than any of the earnings components we study, including accruals and net distributions to both shareholders and debt holders. Market efficiency tests indicate that the market severely punishes firms with suboptimal decreases in cash, but we find no evidence to support the hubris hypothesis that the market overreacts to the earnings implications of unwarranted increases in cash. This article is protected by copyright. All rights reserved.
We use a probit selection model to investigate whether the relation between stock returns and their fundamental determinants varies for China-concept and non-China-concept stocks. In addition, an ordered probit selection model is used as well to explore whether the determinants of stock returns change due to the different level of investments in China. There are a lot of reasons for Taiwanese firms to invest in China. The stock of a firm with capital investments in China is called China-concept stock. A firm can decide whether to go for its capital investments in China or not. It is interesting to investigate whether a firm's decision to invest in China affects the determination of stock returns or not. This investment decision should not be treated as exogenous in examining the determinants of stock returns. Hence, a two-stage selection model is employed for this purpose. We find that heavy-level-investment-in-China firms do exhibit a different relation between stock returns and their fundamental determinants. Book-to-market ratio is the most important determinant of stock returns for all firms.
Firm size and price-to-book-value ratio are prominent measures in explaining cross-sectional stock returns. Historically, average returns on shares of small-capitalization firms and low price-to-book firms have exceeded those on large-capitalization firms and high price-to-book firms. Recent evidence also shows that monetary policy developments significantly explain security returns. When we considered the influence on stock returns of the Federal Reserve's policy stance, we found that size and price-to-book effects depend largely on the monetary environment. Specifically, the small-firm and low price-to-book premiums are economically and statistically significant only in expansive monetary policy periods and are small, and in some instances negative, in restrictive policy periods. This evidence suggests that investors should consider the Fed's policy stance when using strategies that rely on size or price-to-book ratio.
In this paper we show that reasonable proxies for the FF factors can be readily constructed from ‘off the shelf’ style index data. We employ a GMM testing procedure in which the main focus of the tests is to assess the overriding validity of the restrictions placed on the empirical model framework. In addition, we augment the system of equations with a simple mean equation for each of the three FF risk factors, thereby permitting a direct estimate of the associated risk premia. The key findings are as follows. First, the proxy mimicking portfolios do represent pervasive sources of exposure across a sample of industry-sorted portfolios. Second, based on the outcome of all the GMM tests performed on our sample, the evidence seems to quite strongly support the three-factor Fama and French model. Third, when we take into account the estimated risk premia produced by our framework, the conclusion favouring the model has to be downweighted somewhat. Nevertheless, the estimated risk premia for the market and for the book-to-market factor are typically found to be significantly positive. Our main ‘perverse’ finding relates to the size risk premium which in our sample is typically significantly negative. This is consistent with other recent evidence of a ‘reversal’ in the size effect.
I apply a multivariate one-step testing procedure to investigate a dual-beta CAPM. I begin by establishing that there is no statistical relation between beta and returns for the standard CAPM. I then re-cast the one-step test to accommodate a dual-beta CAPM under bull and bear market conditions. When the excess market return is negative (positive), I find strong evidence of a negative (positive) relation between beta and returns. The strength of my results suggests that the success of the model is not crucially dependent on the argument for beta instability.
The "Dogs of the Dow" strategy has become an increasingly popular investment strategy for unit investment trusts, resulting in superior performance for U.S.-based investors. To examine its effectiveness for Canadian investors, we applied this high-dividend-yield strategy to the Toronto 35 Index for the first 10 years of the index's existence. The 10 top-performing portfolios' higher compound returns were sufficient to compensate for taxes and transaction costs. Perhaps more important, both the Sharpe index, which measures excess return to total risk, and the Treynor index, which measures excess return to market risk, indicate that the strategy produced higher risk-adjusted returns than the Toronto 35. The Dogs strategy also performed well against the broader, but similar, Toronto Stock Exchange 300 Index.
Evaluating persistence and market pricing of earnings components, Dechow, Richardson and Sloan [DRS] disaggregate free cash flow into changes in cash and distributions to providers of capital. We further decompose changes in cash into normal components that move firms towards optimum levels of cash holdings and abnormal components that can be positive or negative and, respectively, create either excess or insufficient cash holdings. Negative abnormal changes in cash potentially lead to missed opportunities to invest in positive NPV projects and lower future earnings. Positive abnormal changes in cash potentially lead to wasteful investment and relatively lower future earnings. We hypothesize and find that negative abnormal changes in cash have greater persistence than positive abnormal changes. We also show that the market underreacts to negative abnormal changes in cash. Contrary to the DRS hubris interpretation, we find no evidence of market inefficiency with respect to positive abnormal changes in cash.
Several empirical studies show a systematic relationship between stock characteristics (size, earning yield, dividend yield, etc.) and stock returns. The previous studies, that show stocks with high earnings yield produce superior returns use univariate measures (such as E/P or B/P) to classify stocks into value or growth stocks. This paper shows that the traditional method of classification ignores instances when value and growth investing strategies instead of being mutually exclusive can complement each other in selecting superior performing stocks. Growth in EPS provides a more meaningful way to capture growth than using a measure of low E/P ratio. A strategy focusing on investing in stocks that have the dual characteristics of a high E/P ratio and high growth in EPS outperforms a strategy of high E/P alone. The study also documents some evidence of persistence in performance for stocks having the dual characteristic of high growth in EPS and high E/P ratio.
Most theories of risky choice postulate that a decision maker maximizes the expectation of a Bernoulli (or utility or similar) function. We tour 60 years of empirical search and conclude that no such functions have yet been found that are useful for out-of-sample prediction. Nor do we find practical applications of Bernoulli functions in major risk-based industries such as finance, insurance and gambling. We sketch an alternative approach to modeling risky choice that focuses on potentially observable opportunities rather than on unobservable Bernoulli functions.
This paper examines the market-price to book-value ratio for 6604 bank stock observations from December 31, 2006 through June 30, 2009. We relate each bank’s market-price to book-value ratio to several fundamental ratios and whether the bank took funds from the US Treasury under the Troubled Asset Relief Program (TARP). The results of this study show that banks who took TARP funds have lower market-price to book-value ratios. In addition, lower relative costs, higher non-interest income, and lower assets in non-accrual or foreclosed status are associated with higher market-price to book-value ratios while controlling for size and other bank attributes.
Se intenta en esta investigaci�n generar estrategias de inversi�n cuantitativas basadas principalmente en el an�lisis fundamental desarrollado por Graham y Dodd (1934). Mientras existe cierto consenso que dichas estrategias pueden generar retornos satisfactorios, existe dificultad en explicar la raz�n de dichos retornos. Se postula aqu�, que dichos retornos est�n relacionados, al menos en parte, al flujo de resultados de las compa��as. En lo global, se utiliza una muestra con informaci�n de las m�s importantes empresas que componen el mercado de Canad�, Espa�a, Europa, USA y Gran Breta�a. Se utiliza la metodolog�a est�ndar aplicada por Fama y French (1992) y Lakonishok, Shleifer y Vishny (1994). Dicha metodolog�a consiste en realizar, primero, una simulaci�n hist�rica de las estrategias de inversi�n; para luego, realizar pruebas estad�sticas basadas en an�lisis de regresi�n con m�nimos cuadrados ordinarios. Los resultados muestran que, en resumen, seg�n la evidencia emp�rica obtenida, al parecer mientras mayor sea el valor libro o el resultado por acci�n en relaci�n al precio y mientras menor sea dicho precio, existir� un mayor potencial de retorno futuro de la acci�n. Se confirmar�a en consecuencia la estrategia gen�rica de inversi�n propuesta por Graham y Dodd (1934). Finalmente, cuando se introduce el riesgo y los efectos tama�o y ratio BM, se concluye que la estrategia m�s robusta es comprar acciones de menor precio y con la mayor diferencia entre dicho precio y el resultado contable por acci�n del �ltimo a�o. Sin embargo, no debe descartarse que los hallazgos sean producto de data mining. Nota: se indica mas informacion bibliografica que la reportada.
El presente documento de trabajo, muestra un analisis y la evolucion historica reportada de la eficiencia de mercado, la administracion de carteras de fondos y sobre behavioural finance, principalmente en el mercado de USA, por lejos el mas importante del mundo. Tambien, se muestra investigacion en Espa�a. Primero, se discute brevemente la teoria al respecto, para luego concentrarse en la evidencia empirica reportada. Nota: se indica mas informacion bibliografica que la reportada.
El presente documento de trabajo, muestra la evolucion historica reportada de las estrategias de inversion en acciones, principalmente en el mercado de USA, por lejos el mas importante del mundo. Tambien, se muestra investigacion en Espa�a. Se distinguen tres etapas: la inicial, correspondiente al establecimiento de la teoria del camino aleatorio; la correspondiente al desarrollo del CAPM y APT; y, la actual, correspondiente a las anomalias del CAPM, la cual incluye el estudio del behavioural finance. Nota: se indica mas informacion bibliografica que la reportada.
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