This thesis investigates the inconsistency in modelling financial markets between the sophisticated analytic models based in efficient market theory and persistence in the practical finance world of relatively simplistic approaches to investment, supported by the views of wealthy investors which seem to provide evidence of superior ex-ante performance inconsistent with even simple efficiency concepts. What is often termed 'value' investing is typical of such an approach. Although the term originally implied determining an intrinsic value for the common stock based upon a comprehensive fundamental analysis of a firm, it has more recently become associated with selecting stocks based upon relative values of common publicly available price-related accounting ratios. So-called 'value' stocks are frequently contrasted with 'growth' stocks, being those where higher growth rates are regarded as compensation for low current yields. Despite a general presumption of market efficiency, naive value strategies are supported by numerous academic studies reporting superior returns even after adjusting for risk using the mean-variance capital asset pricing model, arbitrage pricing theory, or in relation to volatility. However, the findings of many of these studies have been challenged on various grounds. The composition of and returns to portfolios of stocks selected from a representative sample of United Kingdom listed companies between 1979 and 1999 by four common price denominated accounting ratios, are examined. The study finds significant differences in returns between portfolios selected on four valuation ratios using a methodology that is robust to many of the criticisms levelled against previous studies, thus supporting the claims that value stocks tend to show superior returns over long holding periods without attracting any obvious element of additional risk. The study also finds that observed differences in returns predicted by one ratio as against another arise because each ratio tends to select different types of firm. It is argued that the observed persistence of certain firms and sectors in high value, high return portfolios, especially those based on cashflow, is evidence that investors do not regard stocks as homogenous, and that theories of investor over or under-reaction do not fully explain the differences in portfolio returns. This study challenges the view that higher returns to value strategies are compensation for higher systematic risks. The findings suggest that multifactor models, in which size and book to market ratio are proxies for unobserved risk, may be miss-specified and that weak or negative cashflow is a more direct indicator of vulnerability to exogenous stress. The evidence reviews securities that are inconsistently classified and the incidence offailure and takeover and concludes that it is simplistic to regard value and growth stocks as representing the extremes of an accounting ratio scale.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:625127 |
| Date | January 2001 |
| Creators | Wade, Kenneth R. |
| Publisher | University of Manchester |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
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