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1 – 10 of over 18000George W. Blazenko and Yufen Fu
The value‐premium is the empirical observation that “value” stocks (low market/book) have higher returns than “growth” stocks (high market/book). The purpose of this paper is to…
Abstract
Purpose
The value‐premium is the empirical observation that “value” stocks (low market/book) have higher returns than “growth” stocks (high market/book). The purpose of this paper is to propose a new explanation for the value‐premium that the authors call the limits to growth hypothesis.
Design/methodology/approach
To guide the testing, a dynamic equity valuation model was used that has the property that profitability increases risk for value firms in anticipation of future growth‐leverage, whereas, profitability “covers” the capital expenditure costs of growth, which decreases risk for growth firms. Because the authors interpret dividends as a corporate response to growth‐limits, they test for this predicted differential relation between profitability and risk for value versus growth stocks with the returns of profitable dividend‐paying firms.
Findings
It is found that profitability increases returns to a greater extent for dividend‐paying value firms compared to dividend‐paying growth firms, which is consistent with a differential relation between profitability and risk. At the same time, it is also found that growth firms have lower returns than value firms.
Originality/value
The authors use the limits‐to‐growth hypothesis to explain why profitability can either increase or decrease risk. High‐profitability dividend‐paying growth firms have lower returns than low‐profitability dividend‐paying value firms. This value‐premium is consistent with the argument that high profitability “covers” the capital expenditure costs of growth, which decreases risk and, thus, returns. At the same time, profitability increases returns to a greater extent for value stocks compared to growth stocks, which is consistent with the hypothesis that profitability increases risk for value firms in anticipation of future growth‐leverage.
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Marcelo Bianconi and Joe Akira Yoshino
This paper aims to empirically investigate the market-to-book/return on equity valuation model.
Abstract
Purpose
This paper aims to empirically investigate the market-to-book/return on equity valuation model.
Design/methodology/approach
The authors use a worldwide commodities sector panel of 6,323 firms from 69 countries with annual observations from 1999 to 2010 to estimate panel ordinary least squares (OLS), instrumental variables (IV) and quantile regressions. They also measure the impact of return on equity on market-to-book uncovering value versus growth and positive versus negative profitability dimensions.
Findings
The new evidence is that the impact of return on equity on market-to-book is time-varying and declining across the years in the sample. There is positive and strong persistence in the market-to-book of companies in this sector worldwide, but value stocks are more persistent than growth stocks. The coefficient of return on equity is positive at the 10th percentile of the market-to-book, but it becomes negative for growth stocks at 90th percentiles. Conditional on negative profitability, the coefficient of return on equity on market-to-book is negative for growth stocks. The effect of the S&P500 volatility index (VIX) is negative, significant and large in magnitude, but declines in absolute value, as the quantiles increase toward the upper 90th percentile.
Practical implications
The commodities sector is important for countries that depend on it for development.
Originality/value
The paper provides a rich panel data approach, and the market-to-book/return on equity valuation model is naturally applied to the commodities sector, as this sector tends to have more tangibles relative to intangibles.
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Maria Teresa Medeiros Garcia and Ricardo António Abreu Oliveira
The purpose of this paper is to construct and evaluate value and growth portfolios in Portugal, Italy, Ireland, Greece and Spain, which are commonly known as the EU PIIGS, from…
Abstract
Purpose
The purpose of this paper is to construct and evaluate value and growth portfolios in Portugal, Italy, Ireland, Greece and Spain, which are commonly known as the EU PIIGS, from 2003 to 2015. Previous research evidence suggests that stocks trading at a lower price relative to their fundamentals (value stocks) tend to outperform stocks that trade at higher prices (growth stocks) in the long run. Although this market anomaly has been studied immensely worldwide, especially for the US stock market, there is no clear evidence whether such an assertion is applicable in less-renowned countries.
Design/methodology/approach
The paper utilises Fama and Macbeth (1973) regressions and its model extensions.
Findings
This paper finds a significant value premium in these countries, which is compatible with previous studies conducted worldwide.
Originality/value
To the best of the authors’ knowledge, this is the first attempt to examine this asset pricing anomaly in the PIIGS.
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Maria Elisabete Neves, Mário Abreu Pinto, Carla Manuela de Assunção Fernandes and Elisabete Fátima Simões Vieira
This study aims to analyze the returns obtained from companies with strong growth potential (growth stocks) and the returns from companies with quite low stock prices, but with…
Abstract
Purpose
This study aims to analyze the returns obtained from companies with strong growth potential (growth stocks) and the returns from companies with quite low stock prices, but with high value (value stocks).
Design/methodology/approach
The sample comprises monthly data, from January 2002 to December 2016, from seven countries, Germany, France, Switzerland, the UK, Portugal, the USA and Japan. The authors have used linear regression models for three different periods, the pre-crisis, subprime crisis and post-crisis period.
Findings
The results point out that the performance of value and growth stocks differs from different periods surrounding the global financial crisis. In fact, for six countries, value stocks outperformed growth stocks in the period that precedes the subprime crisis and during the crisis, this tendency remained only for France, Portugal and Japan. This trend changed in the period following the crisis. The results also show that investor sentiment has a robust significance in value and growth stock returns, mostly in the period before the crisis, highlighting that the investor sentiment is more significant in the moments that the value stocks outperformed.
Originality/value
As far as the authors know, this is the first work that, taking into account the future research lines of Capaul et al. (1993), investigates whether the results obtained by those authors remain current, meeting the authors’ challenge and covering the gap of recent studies on the performance of value and growth stocks. Besides, the authors have introduced a new country, heavily punished by both the global financial crisis and the sovereign debt crisis to understand whether there are significant differences in investment styles and whether this is related to the different economies. Also, in this context, the authors were pioneers in adding investor sentiment as an exogenous variable in the influence of stock returns.
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George (Yiorgos) Allayannis and William Burton
Dick Mayo, one of the most celebrated value investors in America was puzzled by the New Economy's continuous bias toward growth investment strategies. He examines the basics of…
Abstract
Dick Mayo, one of the most celebrated value investors in America was puzzled by the New Economy's continuous bias toward growth investment strategies. He examines the basics of his philosophy versus that of a growth orientation by evaluating the long-term expected returns of several value and growth stocks. This case can be used to pursue several objectives: (1) to define value and growth investing-where the differences lie and whether one approach is superior to the other or whether both have merit; and (2) to discuss issues related to consistency of one's investment philosophy. Should one stay true to one's philosophy even when the market seems to run counter to it for a prolonged period of time? Can value investing deliver value in this New Economy or is it only an Old Economy concept? The students are instructed to perform basic valuations of Cisco Systems (a growth company), CVS, R.R. Donnelley, and Manor Care (value companies) and compute their long-term expected returns. The case comes with an Excel spreadsheet containing the data and relevant valuation ratios for the above firms. The valuations are straightforward, but they tell an interesting story: the expected returns of glamorous stocks in reality may not be so glamorous.
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Lanqing Du, Jinwook Lee, Namjong Kim, Paul Moon Sub Choi and Matthew J. Schneider
Should we include cryptocurrency in risky portfolio investing? Bitcoin, given its status as the leader of cryptocurrencies and a speculative asset due to its non-dividend-paying…
Abstract
Should we include cryptocurrency in risky portfolio investing? Bitcoin, given its status as the leader of cryptocurrencies and a speculative asset due to its non-dividend-paying trait and high volatility as well as high returns, poses an interesting question whether it can also be beneficial in a portfolio of risky assets. In order to find an answer, we revisit the conventional dual objective of minimizing risk and maximizing expected return for risky assets. Various models are tested to analyze the risk-return trade-off of risky portfolios including Bitcoin. Given an initial budget for a finite portfolio, the cumulative filtration yields the expected return and the covariance matrix. With the addition of Bitcoin, we compare the performance of the portfolio generated from the optimization models and technical analysis. The main implications are follows: (1) risk tolerance and diversification constraints are the key factors in portfolio optimization; (2) including cryptocurrency enhances portfolio returns; and (3) the Markowitz model (Kataoka’s and conditional value-at-risk models) recommends to fully weigh (unload) Bitcoin in (from) the portfolio.
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Muhammad Fuad Farooqi and John O’Brien
This paper aims to provide a comparative study of the Islamic versus conventional banking sector risk by using market data generated from the sample of publicly listed Islamic and…
Abstract
Purpose
This paper aims to provide a comparative study of the Islamic versus conventional banking sector risk by using market data generated from the sample of publicly listed Islamic and conventional banks in the Gulf Cooperation Council (GCC) region.
Design/methodology/approach
The authors introduce a market-based measure of bank stress and test this indicator against the Tier 1 Capital Ratio using Granger causality tests.
Findings
The authors find that the market-based measure is a leading indicator of banking stress when compared to the accounting-based Tier 1 ratio and thus is relevant to the Basel regulation’s Pillar 3.
Research limitations/implications
This paper only looks at Islamic vs conventional banks in the Gulf region, and the authors would like to extend this analysis to a broader range of financial institutions, especially in the European and North American markets.
Social implications
Developing a measure that signals bank stress ahead of typically used measures can help regulators, bank management and investors identify oncoming problems and issues before these become too big to manage.
Originality/value
The results from this analysis provides insight into the offsetting impact from two drivers (beta and book-to-market ratio) of the cost of equity capital for the conventional vs Islamic banking sectors.
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Jaspal Singh and Kiranpreet Kaur
The purpose of this paper is to examine the applicability of stock selection criteria of Benjamin Graham in Indian capital market to determine which rules specifically can help…
Abstract
Purpose
The purpose of this paper is to examine the applicability of stock selection criteria of Benjamin Graham in Indian capital market to determine which rules specifically can help the investors to augment their return on investment.
Design/methodology/approach
The independent sample t-test has been employed to examine the stock return differences among the companies which fulfill maximum number of the criteria and the companies fulfilling minimal number. The significance of the excess returns yielded by the criteria is assessed through one sample t-statistics. Further, the applicability of each and every criterion is examined using pooled OLS regression analysis.
Findings
The mean market adjusted returns of the companies which fulfill maximum number of the criteria are significantly different from the companies which fulfill minimal number. The companies those are able to fulfill at least any five criteria, yield excess returns to the investors. However, regression analysis makes it evident that all the criteria are not applicable in present economic environment.
Research limitations/implications
The study recommends that an investor should give due importance to variables mainly high earnings yield, discount to tangible book value and net current asset value, lower leverage and stability in earnings in order to screen value maximizing securities.
Originality/value
This paper extends discussion on application of Graham's stock selection criteria in Indian stock market. The study also enriches the literature on value investing strategies by extending discussion on reasons for the applicability/inapplicability of the Graham's stock selection criteria.
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