Payoffs To Equity Investment Styles On The JSE Securities Exchange: The Case Of South African Equity Market

Abstract

Empirical tests of market efficiency reveal anomalies that cannot be explained by the capital asset pricing model (CAPM) of Sharpe (1964) and Lintner (1965). These anomalies are firm-specific and can be applied to form potential alpha-generating investment styles that capture the characteristics of the anomalies. We estimate and examine the consistency of the payoffs to firm-specific attributes for South African stocks listed on the JSE Securities Exchange (JSE) over the period from 01 January 1997 to 31 December 2007. The firm-specific attributes under examination are extracted from five categories, namely (1) fundamental values relative to share price, (2) solvency and liquidity, (3) fundamental growth, (4) size and return momentum and (5) consensus analyst forecast. Our test results extract significant attributes from all categories with the exception of the solvency and liquidity category. More specifically, we find that firms with higher fundamental values relative to their share prices, firms with higher dividend and earnings growth, firms with lower market capitalization, firms with higher short-term returns and firms with higher earnings forecasts earn relatively higher returns in the subsequent period in a consistent manner.