Small Value Stocks Research Articles

Corporate Factors Influencing Holding Period of Stock: An Analysis of Market Capitalization Threshold

Objective – This study examines the effect of corporate factors on holding period of common stock. The main corporate factors tested are information asymmetry, firm value, earnings per share, and other corporate factors– profitability, company size, leverage, and liquidity–are selected as control variables.Design/methodology – The samples consist of 876 observations of companies listed on the Indonesia Stock Exchange for 2017-2020. Samples were grouped using the threshold method based on their market capitalization to capture the different impacts based on certain conditions. To examine the hypotheses, we employed multivariate analysis with the threshold method.Results – The results show that market capitalization contributes to determining the corporate factors' effect on the holding period of stock. Simultaneously, corporate factors affect significantly the holding period of stock. The increases in firm value, earnings per share, profitability, leverage, and corporate size extend the holding period. However, the emergence of information asymmetry precisely motivates investors to accelerate the holding period.Research limitations/implications – This research did not consider the impact of the Covid 19 pandemic on data even it used data for 2020 (at the onset of pandemic). For future reseach, we suggest to consider the issue of the Covid 19 pandemic in examining the effect of corporate factors on holding period of stock.Novelty/Originality – This study differentiates the samples based on their capitalization value as the novelty. Previous research did not classify the sample based on its capitalization value so large-value stocks are treated the same as small-value stocks. Actually, investors treat these three groups of stocks in different ways

On Survivor Stocks in the S&P 500 Stock Index

This paper investigates the performance and characteristics of survivor stocks in the S&P 500 index. Using both in-sample and out-of-sample comparisons, survivor stocks outperformed this market index by a considerable margin. Relative to other S&P 500 index companies, survivor stocks tend to be small-value stocks that exhibit high profitability and invest conservatively. Surprisingly, survivor stocks tend to be loser stocks with negative exposure to the momentum factor. Further analyses show that the volatility of the survivor stocks portfolio is less exposed to tail risks and responds less to shocks in the innovation process.

On survivor stocks in the S&P 500 stock index

This paper investigates the performance and characteristics of survivor stocks in the S&P 500 index. Using both in-sample and out-of-sample comparisons, survivor stocks outperformed this market index by a considerable margin. Relative to other S&P 500 index companies, survivor stocks tend to be small value stocks that exhibit high profitability and invest conservatively. Surprisingly, survivor stocks tend to be loser stocks with negative exposure to the momentum factor. Further analyses show that the volatility of the survivor stocks portfolio is less exposed to tail risks and responds less to shocks in the innovation process.

The Great Depression and the Great Recession: A view from financial markets

Similarities between the Great Depression and the Great Recession are documented with respect to the behavior of financial markets. A Great Depression regime is identified by using a Markov-switching VAR. The probability of this regime has remained close to zero for many decades, but spiked for a short period during the most recent financial crisis, the Great Recession. The Great Depression regime implies a collapse of the stock market, with small-growth stocks outperforming small-value stocks. A model with financial frictions and uncertainty about policy makers’ intervention suggests that policy intervention during the Great Recession might have avoided a second Great Depression. A multi-country analysis shows that the Great Depression and Great Recession were not like any other financial crises.

Somewhere between Utopia and Dystopia: Choosing from Incomparable Prospects

For ranking incomparable prospects, a ‘Utopia Index’ measuring the proximity to a lower envelope of the integrated distribution functions is proposed. The envelope can be interpreted as a locus of optimal satisfaction levels for a range of permitted preferences. The exact limit distribution for the empirical counterpart of the index for a general class of dynamic processes is derived together with a feasible test procedure based on bootstrapping techniques. There are a wide variety of potential applications wherein classical dominance techniques fail to yield definitive conclusions. To illustrate, an empirical application to Chinese household income data shows how the wellbeing of cohorts impacted by the vagaries of Era’s before, during and after the Cultural Revolution can be ranked in the absence of a dominance relationship; an application to historical investment returns data shows that, depending on the investment universe, investing in small value stocks or small winner stocks is ranked above all alternative strategies.

Share Buybacks and Abnormal Returns

We examine the behavior of stock returns after share buyback announcements. In line with the existing literature, we find evidence of abnormal returns after buyback announcements. A market neutral portfolio that is long equally weighted (with daily rebalancing) all companies that announced within the most recent month and short the IWM ETF/market using a rolling β estimated from the recent 250 days has average annual "abnormal" returns of 11.6% with a Sharpe ratio of 1.3 over the period from 2000-01-20 to 2014-12-31. Moreover, small value-stocks that under performed pre buyback announcement date outperform large growth-stocks that over performed pre buyback announcement date. A portfolio of the first type of companies, in which we hold stocks for one month after buyback announcement, shows annual "abnormal" returns relative to the IWM market index of 16.3% with a Sharpe ratio of 0.8 over the same period. A portfolio of the second type of companies has returns and a Sharpe ratio of 7.6% and 0.4, respectively, over the same period. Finally, we provide evidence that buybacks could potentially provide a signal for timing/predicting the overall market.

Leveraged Small Value Equities

The size premium and value premium are well documented in academic studies. We contribute to this literature by finding that leverage – as defined by long term debt divided by enterprise value – enhances the average returns of a small-value investment strategy. At the company level, our results indicate that there is a positive interaction between leverage and value. We test a variety of quality and technical factors to develop a theory of what works in leveraged small-value equity investing. We develop a ranking system for creating annual portfolios of leveraged small-value stocks in the United States. This ranking system prioritizes smaller, cheaper and more leveraged stocks that are already paying down debt and exhibit improving asset turnover. Annual portfolios of the top 25 stocks in this ranking system have a 25.1% average annual return between 1965 and 2013. At a standard deviation of 39.4%, the Sharpe Ratio of these annual portfolio returns is 0.51. These portfolios have a CAPM alpha of 9.6% and a CAPM beta of 1.66. The average risk-adjusted return of these portfolios is 13.1% per year after controlling for the 3 Fama-French factors, momentum, and liquidity. In addition to providing a novel investment strategy, we believe that our findings have implications for the leveraged buyout industry – which follows an analogous investment approach in the private markets – as well as for public market value investors who have traditionally eschewed leverage.

Chasing Housing Prices?

If a person or organization is planning to buy real estate in the future but is unable or unwilling to buy it now, how can they best hedge this purchase? In what class of asset should they invest their money until they are ready to purchase the real estate? This paper uses Monte Carlo simulation and bootstrap techniques to investigate the effectiveness of using traditional asset classes in managing the long-term risks associated with the future purchase of real estate. We find that the best purchase early hedge for both residential and commercial real estate is small value stocks. Small value stocks would be the most likely to provide returns at least as good as real estate and they would be least likely to suffer losses relative to real estate. The effectiveness of the hedge increases the longer the time horizon of the investor. Large value stocks and equity REITs are also quite good but not as good as small value stocks. Other asset classes are not nearly as effective. The least effective asset class is T-Bills.

Chilean Stock Market Expected Return Analysis: A Variance Decomposition

The main objective of this paper is to quantify the effect of expectation changes about discount rate and dividend growth rate over the Chilean market portfolio returns. The model applied was taken from the works of Campbell and Shiller (1988, 1988a), Campbell (1991) and Campbell and Vuolteenaho (2005). The model expresses the unexpected returns as a function of two components related with: (i). news about future dividends growth and (ii). news about future returns of the market portfolio. The results obtained for the period of 1995-2005 show that the component of news about future dividends explains most of the unexpected portfolio returns variance, contrary to Campbell and Vuolteenaho (2005) find in the US data. Indeed, the differences are explained by the lower persistence observed in the variables utilized in estimates; thus, the long term return forecasting is less acute, which augments the estimation errors and finally, the news about dividends growth importance. Considering some feature of the Chilean stock market such as legal, tax, ownership concentration and information quality, news about future returns should not be as important as in the US stock market. The model also allows to divide, the traditional beta of the Capital Asset Pricing Model (CAPM) in two components, i.e.: (i). a component related with the future cash flows and (ii). a component which reflect the relationship between the stock returns with the discount rates of the market portfolio. The results show that the high return observed in the small-value stocks, it due to their beta is predominated for the cash flow risk component. Thus, the adjustment obtained when beta is separating in these components improves relatively with those resulted from the traditional method. Unlike US, in Chile have not been developed a formal methodology that quantifies the incidence of changes in expectations of discount rates and dividends over stock prices. Additionally, this work is the first in applying an approach of decomposition of the systematic risk in Chilean data.

The Time-Varying Liquidity Risk of Value and Growth Stocks

We study the liquidity exposures of value and growth stocks over business cycles. In worst times, value stocks have higher liquidity betas than in best times, while the opposite holds for growth stocks. Small value stocks have higher liquidity exposures than small growth stocks in worst times, while small growth stocks have higher liquidity exposures than small value stocks in best times. Combined with the fact that growth stocks have lower market risk than value stocks in bad times (as documented by Petkova and Zhang, 2005), our results are consistent with a flight-to-quality explanation for the countercyclical nature of the value premium. Investors seeking safer assets in bad times may want to liquidate value stocks more aggressively than growth stocks. This increase in selling pressure could make value stocks more sensitive to liquidity risk than growth stocks in recessions. We show that the relative order imbalances of value-minus-growth strategies decreases as economic conditions worsen. This suggests that in bad times investors sell value stocks more aggressively than growth stocks, and this activity results in relatively greater illiquidity in value stocks. Overall, exposure to time-varying liquidity risk, combined with the liquidity price of risk, is able to capture 35% of the small-stock value premium and 100% of the large-stock value premium.

International Stock Return Comovements

ABSTRACTWe examine international stock return comovements using country‐industry and country‐style portfolios as the base portfolios. We first establish that parsimonious risk‐based factor models capture the data covariance structure better than the popular Heston–Rouwenhorst (1994) model. We then establish the following stylized facts regarding stock return comovements. First, there is no evidence for an upward trend in return correlations, except for the European stock markets. Second, the increasing importance of industry factors relative to country factors was a short‐lived phenomenon. Third, large growth stocks are more correlated across countries than are small value stocks, and the difference has increased over time.

The Limits of the Limits of Arbitrage

We test the limits of arbitrage argument for the survival of irrationality-induced financial anomalies by sorting securities on their individual residual variability as a proxy for idiosyncratic risk -- a commonly asserted limit to arbitrage -- and comparing the strength of anomalous returns in low versus high residual variability portfolios. We find no support for the limits of arbitrage argument to explain undervaluation anomalies (small value stocks, value stocks generally, recent winners, and positive earnings surprises) but strong support for the limits of arbitrage argument to explain overvaluation anomalies (small growth stocks, growth stocks generally, recent losers, and negative earnings surprises). Other tests also fail to support the limits of arbitrage argument for the survival of overvaluation anomalies and suggest that at least some of the factor premiums for size, book-to-market, and momentum are unrelated to irrationality protected by limits to arbitrage. Copyright 2010, Oxford University Press.

Should Benchmark Indices Have Alpha? Revisiting Performance Evaluation

Standard Fama-French and Carhart models produce economically and statistically significant nonzero alphas even for passive benchmark indices such as the S&P 500 and Russell 2000. We find that these alphas primarily arise from the disproportionate weight the Fama-French factors place on small value stocks which have performed well, and from the CRSP value-weighted market index which is historically a downward-biased benchmark for U.S. stocks. We explore alternative ways to construct these factors and propose alternative models constructed from common and easily tradable benchmark indices. The index-based models outperform the standard models in common applications such as performance evaluation of mutual fund managers.

When Benchmark Indices have Alpha: Problems with Performance Evaluation

Standard Fama-French and Carhart models produce economically and statistically significant nonzero alphas even for passive benchmark indices such as the S&P 500 and Russell 2000. The alphas arise from the disproportionate weight the Fama-French factors place on small value stocks which have performed well, and from the CRSP value-weighted market index which is a downward-biased benchmark for U.S. stocks. We explore alternative ways to construct these factors as well as alternative models constructed from common and easily tradable benchmark indices. Our index-based models outperform the standard models both in terms of asset pricing tests and performance evaluation of mutual fund managers.

Capturing the Value Premium in the U.K. 1955-2001

Using a new dataset of accounting information merged with share price data we find a strong value premium in the U.K. for the period 1955-2001. It exists among small-caps as well as among large-caps. However, there are challenges for small-cap managers wishing to capture these higher expected returns. We show that rebalancing-induced portfolio turnover for indexed small-value strategies can be substantial. Coupled with the relative illiquidity of the U.K. market for small-value stocks, this calls for strategies that sacrifice tracking accuracy in favor of reduced trading needs and lower trading costs.