Fama-French Factor Model Research Articles

Return Differences Between Family and Non-Family Firms: Absolute and Index Differences

The objective of the paper is to determine if family firms are able to provide a return premium compared to their non-family counterparts. The assumption is that some of the benefits and costs related to family ownership can be absorbed into the business model. This may mean that family characteristics could actually impact the perception of the market and in turn affect their returns. We test this by using a unique sample of 152 family firms and matching them with non-family firms on the basis their sector, stock market index and size. Three models - CAPM, Fama-French 3-factor model and Carhart model - are used to test a trading strategy, i.e. buying family firms and selling short non-family firms, on the FTSE All Share, Fledgling and AIM Index. The results showed that the strategy is able to generate an abnormal profit for the firms on the FTSE All Share and Fledgling but fails to do so on the AIM in the presence of the 'momentum' factor-mimicking portfolio. It is far more profitable to use a trading strategy of buying past winners and selling short past losers on the AIM. We further investigate into the factors that drive the returns of family and non-family firms. Using factors related to risk, price-level, liquidity and growth-potential, we find that family firm returns are driven by their growth potential where as non-family firms' need to balance their risk in order to increase returns. A similar application on the 3 indices mentioned above reveals that the AIM and the Fledgling index behave similarly but differ from the FTSE All Share portfolio of firms.

Financial Leverage and Expected Stock Returns: Evidence from Pure Exchange Offers

This paper tests Modigliani-Miller proposition 2, which states that expected stock returns should increase in financial leverage. Past cross-sectional studies have uncovered evidence contradicting this proposition. We employ a time-series approach which allows us to better control for the firm's unlevered (business) risk i.e. asset betas. In addition, we allow for time-varying (non-zero) debt betas, use different measures of financial leverage and consider the Fama-French 3-factor model as an alternative to the CAPM. Using a sample of pure capital structure changes in the form of exchange offers, we find that implied asset betas change after the offer has closed and by too much to be consistent with proposition 2. We conclude that the factor loadings of highly levered companies are too low and find some supporting evidence from a simple trading strategy involving firms with extreme levels of financial leverage.

Specification Test of International Asset Pricing Models

The benchmark model for domestic asset pricing is the Sharpe-Lintner CAPM, which claims that the asset returns are determined by their covariances with the return on the (domestic) market portfolio. But since the late 1970's, the major developed countries have gradually rescinded capital controls and opened the domestic market to international investors. As the global risk factors become more influential, is the local benchmark the right benchmark for asset pricing? This study tries to answer this question by evaluating and comparing several domestic and international asset pricing models. The set of models includes the Sharpe-Lintner CAPM, the International single-beta CAPM (with and without exchange risk), the Fama-French three-factor model (1993), and the International Fama-French multi-factor model (1998). These models are tested on several common sets of assets, which are comprised of size and B/M portfolios both within and across individual countries. (When the investors are constrained to the local market or a fund manager wants to construct a country fund, it is useful to know how local factors and global factors affect asset returns in the single national market. But if the investors have access to foreign markets or the fund manager wants to diversify globally, it is more relevant to price portfolios from different countries.) I use the Hansen-Jagannathan (1997) distance measure (hereafter HJ-distance) to test and compare various models. In addition, this article explores the relation between the Fama-French empirical factors and the business cycle variables, and how exchange risks affect individual portfolio returns. The asset pricing models are mainly required to price the B/M spread in returns, because the size effect is absent from all countries. The asset pricing test results show that the models with constant risk prices fail to price the cross-sectional returns. By allowing the risk prices to fluctuate with business cycle variables, the local Fama-French factor models and the conditional international models are able to pass the HJ-distance test within US and UK. Since the business cycle variables are highly correlated across countries, it suggests the importance of common world risks in local asset pricing. The market integration hypothesis (with the uniform risk prices across countries) is not rejected in cross-country asset pricing, when risk prices are scaled by global industrial production. The conditioning business cycle variables greatly improve the performance of each model, and they are always significantly priced (together with the global market risk when cross-country). Both the value premiums as in Fama and French (1993, 1998) and the exchange risks are priced in unconditional models. However, these factors either are never priced or lose their significance in the presence of industrial production.