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Robustness of Size and Value Effects in Emerging Equity Markets, 1985-2000
Abstract
We examine the robustness of size and book-to-market effects in 35 emerging equity markets during 1985-2000. Book-to-market effects are significant and are robust to tests accounting for non-normality and for firm size effects, and they do not depend on extreme returns. Size effects are also present but do not have the robustness found for book-to-market results. Book-to-market effects are found within size portfolios, but size effects are not found within book-to-market portfolios. Significant size results are produced by extreme returns. Moreover, size effects are found when size is measured relative to the local market but not in tests using absolute firm size. Cross-sectional regressions controlling for global and local systematic risk confirm the findings.
... The size variable was not significant in estimating stock returns in the different periods of study, the only exception being the U.S. market. Moreover, the book-to-market variable was statistically significant at 5% and positive for different time periods in Barry et al. (2002) study in the context of emerging countries as well as in Loughran and Wellman's (2012) study of the U.S. market. The results of both these prior studies are in line with the results obtained for the same variable in this study for the period 2005-2013. ...
The estimation of cross-section returns for defining investment strategies based on financial multiples has been proven to be relevant following Fama and French's (1992) research. One of the challenges for such studies is to identify the main variables that are suitable for explaining the returns in a particular context because the variables that are widely used in developed markets behave differently in emerging countries. In this study, we analyze the predictive power of the EV/EBITDA multiple in the context of the Brazilian stock market. The results show that the analyzed multiple has a strong relationship with the future returns of companies listed on the BM&F BOVESPA index between 2005 and 2013. For the period under review, the investment strategy of purchasing stocks when EV/EBITDA was low and selling stocks when EV/EBITDA was high showed abnormal returns of 15.94% per year, even after controlling for risk factors.
This research identifies and analyzes the implications of capital budgeting techniques implemented by large, medium and small companies, related to the use and calculation of the discount rate - emphasizing in the cost of equity, adjusting it with a size premium and the calculation method of the latter- differentiating between the procedure of family and non-family businesses and the types of projects. Additionally, the same procedure is used for the viability indicators of the projects given their relevance in capital budget. For this, a descriptive analysis accompanied by contingency tables is made to a group of 182 Colombian companies. The results show that (i) only 14% of SMEs that evaluate their projects (93) adjust the discount rate with a size premium, (ii) procedures to define capital budget are more informal in family companies, (iii) expansion and replacement projects are more evaluated by family businesses, while mergers and acquisitions are more evaluated by non-family businesses, and (iv) there is little transfer of knowledge from the academy to the company.
This study revisits size effect and its associated issues, in the Indian market, as recent studies question the persistence of size premium in the global context. We use data from NIFTY 200 stocks for the period 2005 to 2018 and find size effect to be significant for both market-based and accounting-based measures of size. It is not impacted by any definitional issues as highlighted by Berk (Financ Anal J 53(5):12–18, 1997). Size effect also remains significant despite alternative portfolio constructions i.e. forming quintiles, deciles, scores of portfolios even though the premiums vary. Existing literature on size anomaly does not focus on size drift and survivorship bias. We specifically address these dimensions relating to size effect which have received less attention in prior work. In this study, size effect is found to be sensitive to drift in market capitalization. Historical market capitalization used to categorize medium (large) firms may now be a basis for classifying small (medium) firms in recent time periods. Small sized portfolio adjusted for drift provides substantially higher return compared to unadjusted small sized portfolio. Further, to evaluate survivorship bias, size-based portfolios are redesigned using changing components of NIFTY 200 for each formation period. This leads to considerable weakening of size effect. Investors must take this fact into consideration while creating size based portfolios. However, upon using another stable universe of F&O traded stocks, size effect is found to be significant. The study contributes to size anomaly literature for Indian market and shall be useful for portfolio managers, investors, academia and regulators.
Beginning with Banz (1981), I review 30 years of research on the size effect in equity returns. Since Fama and French (1992), there has been a vigorous, ongoing debate on whether the size premium is a compensation for systematic risk. Since the late 1990s, research on the size effect has been characterized by two developments that are seemingly contradictory. At last, theoretical models have emerged in which the size effect arises endogenously as a result of systematic risk. However, recent empirical studies assert that the size effect has disappeared after the early 1980s. In this review, I address this disconnect between recent theoretical and empirical research.
This paper investigates whether including a corporate governance factor in the Fama and French three-factor model helps explain stock returns. By constructing a broad corporate governance index (CGI) for Brazilian public firms, this paper documents that governance does explain average returns on stocks. Most importantly, the governance factor seems to be more powerful than firm size and book-to-market ratio. We also provide evidence that expected stock returns are negatively related to firm-level corporate governance. An investment strategy that bought low-CGI firms and sold high-CGI firms would have earned abnormal returns of around 10% per year during the sample period.
A number of recent papers have analyzed the degree of predictability of stock markets. In this paper, we firstly study whether this predictability is really exploitable and secondly, if the economic significance of predictability is higher or lower in the emerging stock markets than in the developed ones. We use a variety of linear and nonlinear – Artificial Neural Networks – models and perform a computationally demanding forecasting experiment to assess the predictability of returns. Since we are interested in comparing the predictability in economic terms we also propose a modification in the nets’ loss function for market trading purposes. In addition, we consider both explicit and implicit trading costs for emerging and developed stock markets. Our conclusions suggest that, in contrast to some previous studies, if we consider total trading costs both the emerging as well as the developed stock returns are clearly nonpredictable. Finally, we find that Artificial Neural Networks do not provide superior performance than the linear models.
Este artigo visa testar empiricamente a proposta de Estrada (2000) para as empresas que compoem o Ibovespa, avaliando se para mercados emergentes existem outras medidas de risco sistematico diferentes do beta do capital asset pricing model (CAPM). Dessa forma, testou-se o downside risk que capta a parte negativa do retorno. Alem de dados em cross section, utilizaram-se dados em painel, como uma contribuição adicional ao trabalho de Estrada (2000). Os resultados encontrados não confirmam que o downside risk seja uma medida apropriada ao mercado brasileiro. Outras medidas de risco apresentaram melhor correlacao com o retorno, permitindo o calculo do custo de capital com valor diferente daquele obtido pela aplicacao do beta. De acordo com Estrada (2000), os resultados sugerem que os mercados emergentes estao em posicao intermediaria entre os mercados integrados e segmentados, tal como confirmado para o mercado brasileiro.
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