Value-Growth Investment Strategy: Evidence Based on the Residual Income Valuation Model

www.ccsene.org/ijef Inernionl Journl of Economics nd Finnce Vol. 3, No. 4; Sepember 011 Vlue-Growh Invesmen Sregy: Evidence Bsed on he Residul Income Vluion Model Wlid Sleh Associe Professor of Corpore Finnce, Deprmen of Business Arb Open Universiy-Jordn Brnch, P.O.Box 1339. Ammn Jordn Tel: 96-6-563-0630, Fx: 96-6-563-0610 E-mil: w_sleh@ou.edu.jo or wsleh99@yhoo.com Received: Ocober 3, 010 Acceped: Jnury 4, 011 doi:10.5539/ijef.v3n4p33 Absrc This pper explores wheher vlue invesing sregy bsed upon differen specificions of he residul income vluion model is riskier hn "growh" invesing sregy. The pper moives such n invesigion by noing h, consisen wih previous empiricl work, he Ohlson (1995) model undervlues (overvlues) low (high) book-o-mrke socks, whils he Felhm-Ohlson model undervlues equiies relive o sock mrke nd h he vluion error is so high for low book-o-mrke socks. However, he empiricl reserch shows h he Choi e l. (003) pproch yields o overvluion (undervluion) problem for low (high) book-o-mrke socks. The pper finds nd concludes h he "rionl school" proposed o explin he vlue effec is no sisfcory empiriclly. Keywords: Residul Income model, Conrrin Invesmen Sregies, CAPM, Fm nd French hree-fcor Model, nd Vlue Premium. JEL clssificion: G1 1. Inroducion I is generlly cceped h "vlue socks" hve endency o ouperform "growh socks" (for exmple, see Fm nd French 199, 1993, 1995, 1996, 1998; Lkonishok e l. 1994; Gregory e l. 001; Chn e l. 1991, mongs ohers). The vlue effec refers o he posiive relionship beween sock reurns nd some ccouning-bsed mesures such s book-o-mrke, ernings-o-price, dividends-o-price, nd so on. The vlue effec suggess h conrrin zero ne invesmen sregy (buying "vlue socks" nd selling "growh socks") will yield posiive reurns. Severl heories hve been offered o explin he vlue effec. Some uhors rgue h his vlue effec my resul from he fc h high book-o-mrke implies higher discoun re (he rionl school). Th is, such sock is riskier nd should hve higher risk nd lower ernings-growh prospecs hn "growh sock" For exmple, Fm nd French (199, 1993, 1995, 1996, nd 1998) show h he vlue effec is ssocied wih he degree of relive disress in he economy. They show h some common vriion in sock reurns (disressed socks) re no explined by he mrke reurn. Therefore, hey rgue h such vlue effec is priced in ddiion o he rdiionl CAPM-ype mrke risk. The uhors sugges hree-fcor model wih one fcor proxied by risk reled o fundmenl relive disress (high-minus-low book-o-mrke; HML) nd noher fcor proxied by risk reled o he size effec (smll-minus-big, SMB). Fm nd French find h HML nd SMB fcors hve he grees explnory power in explining he cross secion of reurns nd sugges h such fcors omied from he CAPM. Overll, Fm nd French rgue h he observed higher reurns produced by such vlue effec re jusified by he risk ssocied wih "vlue socks". Some uhors pper o suppor his heory by linking ime vriion in he vlue effec o vribles such s GDP h cpures ggrege mcroeconomic risk (e.g. Vsslou, 000; nd Cooper e l., 001). For exmple, Suh (009) provides evidence suggesing h mos of mrke be esimes re sisiclly significn nd pper o be economiclly consisen wih he sysemic risk exposure of individul socks. Min e l (009) lso suppor he risk-bsed heory by confirming h vlue socks re riskier hn growh socks in bd imes. Anoher explnion for he vlue effec is he "irrionl school". Such heory holds h individul socks re no priced correcly. Thus, conrrin sregies yield higher reurns becuse hey exploi he endency of some invesors o overrec o good or bd news. For insnce, Lkonishok e l. (1994) rgue h vlue sregies re no fundmenlly riskier hn growh sregies. They sugges h such vlue effec rises becuse fuure growh res of "growh socks" re consisenly overesimed relive o "vlue socks". Such "irrionl school" holds h individul socks re no priced correcly, h is, individul invesors pu excessive weigh on recen ps hisory Published by Cndin Cener of Science nd Educion 33

www.ccsene.org/ijef Inernionl Journl of Economics nd Finnce Vol. 3, No. 4; Sepember 011 nd herefore, do no mke rionl predicions of fuure prices. Hugen nd Bker (1996), Dniel nd Timn (1997), Griffin nd Lemon (001) nd Dniel e l. (001) suppor he previous view. However, Shleifer nd Vishny (1990) nd De Long e l. (1990) rgue h insiuionl invesors end o fvor growh sregy h is more likely o yield higher reurns in he shor run whils vlue sregies end o py high bnorml reurns over 3 o 5 yers. Furher, Asghrin nd Hnsson (009) confirm he exisence of non-risk-bsed componen which cnno be cpured by he mrke fcor. They show h lrge pr of observed book-o-mrke effec hs non-risk-bsed explnion. This pper seeks o dd o he curren debe on he source of he vlue effec by using hree unique vluions mesures; Ohlson (1995), Felhm nd Ohlson (1995), nd Choi e l. (003) models. The reminder of his pper is s follows. Secion moives reserch hypohesis. Secion 3 presens reserch mehodology, whils Secion 4 provides he empiricl resuls. Finlly, Secion 5 concludes.. Reserch Hypohesis Sleh (010) shows h differen socks hve differen men reversion of bnorml ernings. He uses hree specificions of he residul income vluion model; nmely: Ohlson (1995) model, Felhm nd Ohlson (1995) model, nd Choi e l. (003) pproch. He provides evidence suggesing h he Ohlson (1995) model undervlues (overvlues) low (high) book-o-mrke socks, whils he Felhm-Ohlson pproch undervlues equiies relive o sock mrke nd h he vluion error is so high for low book-o-mrke socks. However, he finds h he Choi e l. (003) pproch yields o overvluion (undervluion) problem for low (high) book-o-mrke socks. One implicion of he bove resuls is o exmine he rionl versus irrionl explnions of vlue premium. Recll h he rionl explnions of vlue premium focus on convenionl neoclssicl finnce heory in which vlue socks ouperform growh socks becuse he former re fundmenlly riskier hn he ler in cerin specs (e.g. Fm nd French, 1993, 1995, nd 1996). By conrs, he irrionl explnions of vlue premium focus on he over-exrpolion of ernings (e.g. Lkonishok e l., 1994; Gregory e l. 001; mongs ohers). This pper hypohesizes h if he irrionl explnions re correc, hen we could expec h n invesmen sregy (buying high V/P rio socks nd selling low V/P rio socks, where V is he fundmenl vlue of sock nd P is he mrke price of sock) bsed on he Ohlson (1995) model will led o bnorml reurns; whils n invesmen sregy bsed on he Choi e l (003) pproch will led o negive reurns. Furhermore nd consisen wih Sleh s (010) rgumen, he pper expecs h n invesmen sregy using he Felhm nd Ohlson (1995) pproch will no led o bnorml reurns. 3. D & Reserch Mehodology 3.1 D The pper uses d which covers he period from 1976-001. The pper uses nnul ccouning d from he DSrem, whils i uses London Shre Price Dbse o collec monhly reurn d. The number of firms over he smple period is round 3500. The verge porfolio size over he smple period is 74 for ech porfolio. Tble 1-1 shows he summry descripive sisics of V/P rio. Following previous reserch (e.g.gregory, Sleh, nd Tucker (005)), he pper excludes firms wih negive book vlue of equiy. 3. Model Specificions Sleh (010) invesiges he empiricl performnce of he residul income vluion model by esiming differen specificions bsed on he Ohlson (1995) nd Felhm nd Ohlson (1995) models. The firs specificion which represens he Ohlson (1995) model includes vlue-relevn informion from non-ccouning source; implying h book vlue of equiy, curren bnorml ernings nd he "oher informion" embedded in he forecs of nex periods bnorml ernings ll conin incremenl informion bou price. Thus, Where, 1 11 (1 r) 1 r ) (1 r )(1 r ) ( 11 11 1 FV BV X (1) X 1 X e () 1 10 11 1 e (3) 1 0 1 1 34 ISSN 1916-971X E-ISSN 1916-978

www.ccsene.org/ijef Inernionl Journl of Economics nd Finnce Vol. 3, No. 4; Sepember 011 Noe h FV is he fundmenl vlue of equiy de, BV represens book vlue of equiy de, X is he residul income (bnorml ernings) in period, which equls X -r.bv -1, X represens ernings for period, BV -1 is he lgged book vlue of equiy, r is he risk-free ineres re or cos of equiy cpil, nd re he persisence prmeers, reflecs he exen o which he curren level of bnorml ernings is likely o persis ino he fuure. is vlue-relevn informion oher hn bnorml ernings. The second specificion represens he Felhm nd Ohlson (1995) model; i ignores he oher informion vrible. As in Myers (1999), his specificion cn be modeled s: where, 0 10 1 r )r ( 11 X FV ) BV (4) 0 1 X ( 1 X BV e (5) 1 10 11 1 1, 1 BV BV e (6) 1, 1 1 11 1 r ) ( 11 1 (1 r) (1 r 11)(1 r ) The hird specificion proposed by Choi e l. (003) which is similr o he Ohlson model, bu includes inercep erms from he genering processes for scled residul income nd he oher informion vrible. Choi e l. use book vlue of equiy insed of mrke vlue s deflor. Their LIM pproch is s follows: X 1 X 10 11 e1, 1 (7) BV BV BV BV 1 0 1, 1 BV BV BV They, hen derive he following vluion funcion: e (8) 1 1X ( 1 3 4 3, 1 G e (9) FV ) BV (10) where, 1, nd s previously defined in he Ohlson model, whils (1 r) (1 r) 10 0 3 4 (1 r11)(1 rg) (1 r11)(1 r1)(1 rg) 3.3 The Porfolio Formion Procedures This pper conducs porfolio nlysis pproch o exmine wheher he vlue mesures implied by he bove hree specificions of he residul income vluion model re ble o predic long-run fuure sock reurns of up o five yers. Thus, his pper uses he rio of he fundmenl model vlues o observed equiy vlues; FV/P rio, where FV is he fundmenl vlues mesured bsed on he bove specificions nd P is he mrke vlue of equiy six monh fer he fiscl yer end. For ech yer, socks re sored ino deciles bsed on FV/P rio vlues for ech specificion of he residul income vluion model. Lower deciles consis of socks h re overpriced (growh socks) relive o fundmenl vlue nd re likely o experience lower fuure sock reurns. Higher deciles consis of socks h re under-priced (vlue socks) relive o fundmenl vlue nd re expeced o genere higher fuure sock reurns. To be included in he smple, firms mus hve d on he FV/P rio recorded beween he end of April of yer -1 nd he firs of My of yer. The proceeds from sock h de-liss during he holding period re disribued mong oher socks in he porfolio ccording o heir vlue-weigh. The pper llows for les four-monh lg beween he mesuremen of ccouning nd reurns d o ensure h ccouning d re vilble he de of formion. For ech porfolio, he pper compues reurns for: (1) ech of he following five yers, R1 Published by Cndin Cener of Science nd Educion 35

www.ccsene.org/ijef Inernionl Journl of Economics nd Finnce Vol. 3, No. 4; Sepember 011 o R5; () he verge nnul reurn over he five-yer period (AR); nd, (3) he verge cumulive five-yer reurn wih nnul compounding (ACR5). 3.4 Risk djused reurns- The One-Fcor Model This pper ess wheher he CAPM cn explin differences in he reurns beween vlue nd growh porfolios (or VMG porfolios). R R Ri R f i i m f + e i (11) Where: Ri = he monhly porfolio vlue-weighed reurns. R m = he monhly reurn of he FTSE All Shre Tol Reurn Index R f = he monhly 3-monh Tresury bill re he beginning of he monh This pper exmines wheher he inercep in ech of he regressions is equl o zero using convenionl -sisic. Porfolio reurns re clculed by eqully weighing ech of he 5 yers vlue-weighed porfolio reurns in clendr ime. This implies some modes re-blncing ech yer, s he previous yer 5 porfolio holding drops ou nd hs o be replced by he new firs yer porfolio. In ddiion, weighings beween yers chnge. The dvnge of his pproch is h informion from ll 5 yers of porfolio s life is used, s opposed o previous pproches o risk ssessmen where only firs yer reurns re exmined. An imporn chrcerisic is h his sregy is replicble by invesors. 3.5 Risk djused reurns- The Three-Fcor Model In ddiion o he one-fcor nlysis, he pper lso employs he Fm nd French (1993) hree-fcor model o explin he difference in reurns beween vlue nd growh socks. The model is: R i R R R s SMB h HML e (1) f i i m f i i + i SMB (smll minus big) is he difference, ech monh, beween he verge of he reurns on he hree smll-sock porfolios (S/L, S/M, nd S/H) nd he verge of he reurns on he hree big-sock porfolios (B/L, B/M, nd B/H). HML is he difference, ech monh, beween he verge of he reurns of he wo high-book-o-mrke porfolios (S/H nd B/H) nd he verge of he reurns on he wo low-book-o-mrke porfolios (S/L nd B/L). Following Fm nd French nd Gregory e l. (001), he mimicking porfolios for he size (SMB) nd book-o-mrke (HML) fcors re consruced s follows. A he end of June of ech yer socks re lloced o wo groups (big or smll, b or s) bsed on wheher heir mrke vlue is bove or below he medin of he lrges 350 compnies. Furher, socks re lloced in n independen sor o hree book-o-mrke groups (high, medium, nd low; H, M or L) bsed on he brekpoins for he op 30 percen, middle 40 percen, nd boom 30 percen of he book-o-mrke vlues recorded for he lrges 350 compnies he end of yer -1. From he inersecion of he wo size groups (S nd B) nd he hree book-o-mrke groups (L, M, H), six size-book-o-mrke porfolios re consruced (S/L, S/M, S/H, B/L, B/M, B/H). In ddiion, he pper exmines reurns in differen mrke condiions; up mrke nd down mrke, nd ddiionlly exend he Fm nd French hree-fcor model for ech of he VMG porfolios in boh up mrke nd down mrke. 4. Empiricl Findings 4.1 Reurns o he Differen Specificions of he Residul Income Vluion Model Invesmen Sregy Tble 1- repors vlue-weighed reurns for porfolios formed bsed on he hree specificions of he residul income model esimions of he V/P rio. Pnel A shows he resuls for he firs specificion (he Ohlson model). A generl resul is h s V/P increses, verge reurns end o increse monooniclly. The verge reurn for VMG1 (VMG) porfolio over he five-yer period is 0.133 (0.105) nd he verge cumulive five-yer reurn is 0.776 (0.604). Pnel B gives he reurns for he second specificion; Felhm nd Ohlson model. Consisence wih he expecion of his pper, he difference in reurns beween high V/P socks nd low V/P socks is miniml. Pnel C gives he reurns for he hird specificion (Choi e l. pproch). The verge reurn for he VMG1 (VMG) is -0.093 (-0.078) nd he verge cumulive five-yer reurn is -0.49 (-0.35). These resuls re consisence wih he pper's expecion. 4. Explining he Difference in Reurns Beween Vlue nd Growh Socks 4..1 The One-Fcor Model This subsecion ims o es wheher he CAPM cn explin individul porfolio reurns nd reurn differences beween vlue nd growh socks (VMG). Tble presens CAPM model prmeers wih decile reurns or VMG 36 ISSN 1916-971X E-ISSN 1916-978

www.ccsene.org/ijef Inernionl Journl of Economics nd Finnce Vol. 3, No. 4; Sepember 011 reurns s he dependen vrible. This pper uses monhly reurns for porfolios bsed on he V/P rio over five-yer period, for ech of he hree specificions of he residul income vluion model. Pnel A repors he resuls for he firs specificion (he Ohlson model). The inercep is ypiclly close o zero wih few excepions for exreme vlue porfolios. The esimed loding of he mrke fcor is highly significn. Thus, he one-fcor model explins high porion of he ime series vriion in reurns for ll en porfolios. However, he inercep for he hedge porfolios (VMG1 nd VMG) is significnly greer hn zero. The esimed loding mrke fcor for hese porfolios is negive nd insignificn. Therefore, here is no evidence here o sugges h vlue-bsed invesing sregies re convenionlly more risky hn growh sregies. Pnel B presens he resuls of he second specificion (Felhm nd Ohlson model). The inercep coefficien for he hedge porfolios is close o zero, bu he esimed loding of he mrke fcor is significn (no significn) for VMG1 (VMG). Pnel C (he hird specificion; Choi e l.) shows h he inercep coefficien is negive nd significn for VMG1 nd VMG porfolios. Furher, he esimed mrke fcor is negive nd significn for boh porfolios (VMG1 nd VMG). The resuls from Pnels B nd C my sugges risk explnion for differences in reurns beween vlue nd growh porfolios. However, more invesigion is needed since he djused R for VMG1 nd VMG is very low, which suggess h he CAPM is no plusible o explin reurn differences beween vlue nd growh socks. 4.. The Three-Fcor Model In Tble 3 he pper ess wheher he hree-fcor model cn explin differences in reurns beween vlue nd growh socks. Overll, he ble revels h he hree-fcor model significnly improves he pper biliy o explin he ime series vriion in sock reurns. The resuls for he hedge porfolios (VMG1 nd VMG) revel h he hree-fcor model hs fr greer R hn he one-fcor model. The inercep coefficiens re sisiclly explnory power in erms of djused significn nd posiive (negive) for he firs (hird) specificion. For he second one, he inercep coefficien is no significn. The esimed loding of he mrke fcor is no significn (significn) 5% level for he firs nd second specificions (for he hird specificion). The loding of book-o-mrke nd size fcors is significn nd posiive for he firs nd second specificions; excep for he size fcor of VMG1 in he second specificion. For he hird specificion, he loding of book-o-mrke nd size fcors is significn nd negive; excep for he size fcor of VMG1. Noe h he loding on he book-o-mrke fcor is lower for vlue hn for growh porfolios nd such resul is no consisence wih h in he firs nd second specificions. Therefore, he vlue premium does no work in he hird specificion. In sum, he hree-fcor model cpures more of he vriion in sock reurns hn he one-fcor model, bu here is some unexplined vriion in sock reurns no cpured by he Fm nd French hree-fcor model. Furhermore, he overll resuls provide no evidence o sugges h vlue-bsed invesing sregies re convenionlly riskier hn growh sregies. 4..3 Anlysis of Mrke Condiions In his secion he pper exmines reurns in good mrke condiions ("up mrke") nd bd mrke condiions ("down mrke"). Lkonishok e l. (1994) rgue h if he risk-model (rionl school) is plusible in explining he difference in reurns beween vlue nd growh socks, hen, we would expec h vlue socks do worse in poor mrke condiions. Tble 4 (5) presens he hree-fcor model esimed in n up mrke (down mrke) using porfolios formed bsed on he hree specificions of he residul income model. In up mrke condiions, for hedge porfolios, he inercep coefficiens for ll hree specificions re close o zero nd no significn 5% level. The mrke risk premium ends o be negive hough no significn in is effec, excep for VMG1 in he second specificion. The book-o-mrke nd size fcors end o be significn nd posiive in he firs nd second specificions, whils hey end o be significn nd negive in he hird specificion. In down mrke condiions, he inercep coefficiens re no significn for ll hree specificions for he hedge porfolios. An imporn noe is h he loding of he mrke fcor is no significn in ll hree specificions for he hedge porfolios. The loding of he size fcor is significn nd posiive in he firs specificion, whils i is no significn in he second nd hird specificions. The loding of book-o-mrke fcor is significn nd posiive in he firs nd second specificions, whils i is significn nd negive only for VMG in he hird specificion. In sum, he bove resuls provide no evidence o sugges h vlue socks re riskier hn growh socks. 5. Summry nd Conclusion The im of his pper ws o dd o he curren debe on he source of he vlue effec by using hree unique vluion mesures; Ohlson (1995), Felhm nd Ohlson (1995), nd Choi e l. (003) models. Therefore, he pper Published by Cndin Cener of Science nd Educion 37

www.ccsene.org/ijef Inernionl Journl of Economics nd Finnce Vol. 3, No. 4; Sepember 011 pplied porfolio nlysis pproch o invesige wheher he vlue mesures implied by he bove hree specificions re ble o predic long-run fuure sock reurns. The pper shows h he hree-fcor model cpures more of he vriion in sock reurns hn he one-fcor model. However, here re some unexplined vriion in sock reurns no cpured by he Fm-French hree-fcor model. Moreover, he pper shows h he vlue effec does no work in some specificions. For insnce, n invesmen sregy of buying high V/P rio socks nd selling low V/P rio socks bsed on he Ohlson model leds o bnorml reuns, whils n invesmen sregy bsed on he Choi e l pproch leds o negive reurns. Furher nd consisen wih Sleh s (010) rgumen, he pper shows h n invesmen sregy using he Felhm-Ohlson model leds o no bnorml reurns. Such resuls open new sigh for fuure reserch on he sources of vlue effec nd o discuss he reson of he inconsisen findings in he bove hree differen specificions. One migh rgue h he informion conen of ech model is slighly differen nd/or h he reson of he inconsisen findings is due o scle effec; mrke vlue versus book vlue of equiy. Overll, his pper shows nd concludes h he "rionl school" proposed o explin he vlue effec is no sisfcory empiriclly. References Amihud, Y nd H. Mendelson. (1986). Asse Pricing nd he Bid-Ask Spred. Journl of Finncil Economics 17, PP. 3-49. Asghrin, H nd B. Hnsson. (009). Book-o-Mrke nd Size effecs: compensions for risks or oucomes of mrke inefficiencies. The Europen Journl of Finnce, Vol. 16, Issue, PP. 119-136. Bsu, S. (1977). Invesmen Performnce of Common Socks in Relion o heir Price-Ernings Rio: A Tes of he Efficien Mrke Hypohesis. Journl of Finnce, 3: 663-68. doi:10.307/36304, hp://dx.doi.org/10.307/36304 Chn, L., Hmo, Y. nd Lkonishok, J. (1991). Fundmenls nd sock reurns in Jpn. Journl of Finnce, 46: 1739-1764. doi:10.307/38571, hp://dx.doi.org/10.307/38571 Choi, Y-S, J. O Hnlon nd P. Pope. (003). Liner Informion Models In Residul Income-Bsed Vluion: Inercep Prmeers nd Vluion bis. Working Pper, Lncser Universiy. Conrd, J. nd Kul, G. (1993). Long-erm mrke overrecion or bises in compued reurns? Journl of Finnce, 48: 39-63. doi:10.307/38881, hp://dx.doi.org/10.307/38881 Cooper, M., H. Gulen nd M. Vsslou. (001). Invesing in size nd book-o-mrke porfolios using informion bou he mcroeconomy: some new rding rules, mimeo, Columbi Universiy, New York. Dniel, K. nd Timn, D. (1997). Evidence on he chrcerisics of cross-secionl vriion in sock reurns. Journl of Finnce, 5: 1-33. doi:10.307/39554, hp://dx.doi.org/10.307/39554 Dniel, K., Hirshleifer, D., nd S. H. Teoh. (001). Invesor Psychology in Cpil Mrkes:Evidence nd Policy Implicions, Journl of Monery Economics, 49: 139-09. Dechow, P. M., Huon, A.P. nd Slon, R.G. (1999). An empiricl ssessmen of he residul income vluion model. Journl of Accouning nd Economics, 6: 1-34. De Long, J.B., A. Shleifer, L. Summers nd R. Wldmnn. (1990). Noise rder risk in finncil mrkes, Journl of Poliicl Economy, Vol. 98, pp. 703-738. Fm, E. nd French, K. (199). The cross-secion of expeced sock reurns. Journl of Finnce, 46: 47-466. doi:10.307/3911, hp://dx.doi.org/10.307/3911 Fm, E. nd French, K. (1993). Common risk fcors in he reurns on socks nd bonds. Journl of Finncil Economics, 33: 3-56. doi:10.1016/0304-405x(93)9003-5, hp://dx.doi.org/10.1016/0304-405x(93)9003-5 Fm, E. nd French, K. (1995). Size nd book-o-mrke fcors in ernings nd reurns. Journl of Finnce, 50: 131-155. doi:10.307/3941, hp://dx.doi.org/10.307/3941 Fm, E. nd French, K. (1996). Mulifcor explnions of sses pricing nomlies. Journl of Finnce, 51: 55-84. doi:10.307/3930, hp://dx.doi.org/10.307/3930 Fm, E. nd French, K. (1998). Vlue versus growh: he inernionl evidence. Journl of Finnce, 53: 1975-1998. Felhm, G.A. nd Ohlson, J.A. (1995). Vluion nd clen surplus ccouning for opering nd finncil civiies. Conemporry Accouning Reserch, 11(): 689 73. doi:10.1111/j.1911-3846.1995.b0046.x, hp://dx.doi.org/10.1111/j.1911-3846.1995.b0046.x 38 ISSN 1916-971X E-ISSN 1916-978

www.ccsene.org/ijef Inernionl Journl of Economics nd Finnce Vol. 3, No. 4; Sepember 011 Ferson, W. nd Hrvey, C. R. (1993). The risk nd predicbiliy of inernionl equiy reurns. Review of Finncil Sudies, 9(3): 57-566. Gregory, A., Hrris, R. D. F. nd Michou, M. (001). An nlysis of conrrin invesmen sregies in he UK. Journl of Business Finnce nd Accouning, 8: 1-36. doi:10.1111/1468-5957.0041, hp://dx.doi.org/10.1111/1468-5957.0041 Gregory, A., Hrris, R. D. F. nd Michou, M. (003). Conrrin invesmen nd mcroeconomic risk. Journl of Business Finnce nd Accouning, 30(1&): 13-55. doi:10.1111/1468-5957.00004, hp://dx.doi.org/10.1111/1468-5957.00004 Gregory, A., Sleh, W. nd Tucker, J. (005). A UK es of n inflion-djused Ohlson Model. Journl of Business Finnce nd Accouning, 3(3&4): 487-534. Griffin, D. M. nd M. L. Lemon. (001). Does Book-o-Mrke Equiy Proxy for Disress or Overrecion? Working Pper, Universiy of Arizon. Hugen, R.A. nd N.L. Bker. (1996). Commonliy in he deerminns of expeced sock reurns, Journl of Finncil Economics, Vol. 41, pp. 401-439. doi:10.1016/0304-405x(95)00868-f, hp://dx.doi.org/10.1016/0304-405x(95)00868-f Kohri, S. P., Shnken, J. nd Slon, R. G. (1995). Anoher look he cross-secion of expeced reurns. Journl of Finnce, 50: 185-4. doi:10.307/3943, hp://dx.doi.org/10.307/3943 Lkonishok, J., Shleifer, A. nd Vishny, R.W. (1994). Conrrin invesmen, expecion, nd risk. Journl of Finnce, 49: 1541-1578. Lo, A. W. nd Mckinly, A. C. (1990). D-snooping bises in es of finncil sse pricing models. Review of Finncil Sudies, 3: 431-467. doi:10.1093/rfs/3.3.431, hp://dx.doi.org/10.1093/rfs/3.3.431 Min, B, J, Kng, nd Ch. Lee. (009). Mcroeconomic Risk nd he Cross-Secion of Sock Reurns. Working pper, Ohio Se Universiy nd Kis Business School. Myers, J. N. (1999). Implemening Residul Income Vluion wih Liner Informion Dynmics. The Accouning Review, Vol.74, No.1, PP.1-8. doi:10.308/ccr.1999.74.1.1, hp://dx.doi.org/10.308/ccr.1999.74.1.1 Ohlson, J. A. (1995). Ernings, book vlues, nd dividends in equiy vluion. Conemporry Accouning Reserch, 11(): 661-678. doi:10.1111/j.1911-3846.1995.b00461.x, hp://dx.doi.org/10.1111/j.1911-3846.1995.b00461.x Ohlson, J. A. (001). Ernings, Book Vlues, nd Dividend In Equiy Vluion: An Empiricl Perspecive. Conemporry Accouning Reserch Vol 18, PP. 107-10. doi:10.1506/7tpj-rxqn-tqc7-ffae, hp://dx.doi.org/10.1506/7tpj-rxqn-tqc7-ffae Sleh, Wlid. (010). Liner Informion Dynmic Prmeers: Mrke-Wide vs. Group-Wide Esimion. Journl of Inernionl Accouning nd Finnce, Vol., No. 3/4, PP. 75-97. doi:10.1504/ijaf.010.034400, hp://dx.doi.org/10.1504/ijaf.010.034400 Shleifer, A. nd R. Vishny. (1990). Equilibrium shor horizons of invesors nd firms, Americn Economic Review Ppers nd Proceedings, Vol. 80, pp. 148-153. Suh, D. (009). The Correlions nd Voliliies of Sock Reurns: The CAPM Be nd he Fm-French Fcors. Working pper, Wes Virgini Universiy. Vsslou, M. (000). News reled o fuure GDP growh s risk fcor in equiy reurns, Working Pper, Columbi Universiy, New York. Whie, H. (1980). A heeroskedsiciy-consisen covrince mrix esimor nd direc es for heeroskedsiciy. Economeric, 48: 817-838. doi:10.307/191934, hp://dx.doi.org/10.307/191934 Noes Noe 1. Noe h "vlue socks" refer o socks wih low price-ernings rios nd high projeced ernings-growh rios; whils "growh socks" refer o socks wih high price-ernings rios nd low projeced ernings-growh rios. Noe. Noe h Bsu (1997) finds significn posiive relion beween ernings-o-price rios nd verge reurns h could no be explined by he CAPM. Noe 3. Noe h some uhors hve rgued for smple selecion bises or d snooping (e.g. Lo nd McKinly, 1990; nd Kohri e l., 1995). Ohers hve rgued for liquidiy effec (Amihud nd Mendelson, 1986). Conrd nd Kul (1993) sser h sock prices ke emporry swings wy from heir fundmenl vlues due o wves of Published by Cndin Cener of Science nd Educion 39

www.ccsene.org/ijef Inernionl Journl of Economics nd Finnce Vol. 3, No. 4; Sepember 011 opimism nd pessimism. However, he debe in he lierure hs focused on wo cenrl rgumens (rionl vs. irrionl explnions). Noe 4. Previous reserch used o ssume h ll socks hve he sme men reversion of bnorml ernings (e.g. Dechow, Huon, nd Slon, 1999; Myers, 1999; nd Gregory, Sleh, nd Tucker, 005). However, unlike previous reserch Sleh (010) relxes he bove ssumpion by invesiging wheher differen socks hve differen men reversion of bnorml ernings. Noe 5. Noe h his specificion represens he residul income vluion model proposed by he Ohlson (1995) model. Noe 6. Following suggesion by Ohlson (001), his pper esimes he oher informion vrible, s he difference beween he mrke expecion of residul income for period +1 bsed on ll vilble informion nd he expecion of bnorml ernings bsed only on curren period residul income, h is, E[ X 1] 11 X. For more deils, see Gregory, Sleh, nd Tucker (005). Noe 7. Myers (1999) rgues h ccouning conservism my influence he long-run residul income series. Thus, his specificion includes conservism prmeer which is cpured by, he book vlue effec of residul 1 income. Furhermore, represens growh in book vlue of equiy which mus be equl o or greer hn one for going concern, bu less hn one plus he discoun re. Noe 8. Following Myers (1999), his pper includes ll ne sses nd ll ernings insed of using finncil sses nd opering income. Noe h residul income nd opering residul income re equl since finncil sses only ern norml ernings (Myers, 1999). Noe 9. The uhors rgue h his pproch will void he implici ssumpion h scled residul income nd he oher informion vrible hve mens of zero. Noe 10. Noe h G here is equivlen o in he second specificion, herefore, i defines s he medin rio of yer +1 book vlue of equiy o yer book vlue of equiy. Noe 11. This pper begins porfolio formion on he firs of Sepember every yer becuse more hn wo hirds of he firms lised on he London Sock Exchnge hve heir fiscl yer end in December nd Mrch. Noe 1. The uhor would like o hnk Aln Gregory for such hough. Noe 13. Mimicking porfolios refer o porfolios h my be subsiued for he fcors in fcor model regression o mesure he bes, nd whose expeced reurns re he risk premium (Ferson nd Hrvey, 1993). Noe 14. This uses he lrges 350 compnies insed of he whole smple in order o reduce he imblnce in he mrke vlue of he smll nd lrge groups. The pproch here is consisen wih Fm nd French (1993 nd 1996). Noe 15. Noe h following Gregory e l. (003), his pper runs regressions for monhs when he mrke excess reurns re posiive (up mrkes) nd for monhs when he mrke excess reurns re negive (down mrkes). Tble 1-1. Summry Descripive Sisics of V/P Rio Pnel A: Ohlson Model P1 P P3 P4 P5 P6 P7 P8 P9 P10 Men 0.45 0.60 0.65 0.7 0.79 0.87 0.97 1.08 1.1 1.40 Sd 0.04 0.05 0.04 0.03 0.03 0.03 0.05 0.05 0.10 0.71 Pnel B: Felhm-Ohlson Model Men 0.60 0.63 0.67 0.7 0.69 0.75 0.81 0.89 1.01 1.0 Sd 0.06 0.0 0.0 0.0 0.03 0.0 0.03 0.05 0.11 1.40 Pnel C: Choi e l Model Men 0.18 0.35 0.53 0.66 0.8 0.97 1.5 1.85.63 7.73 Sd 0.06 0.05 0.04 0.05 0.05 0.07 0.10 0.6 0.45 6.76 Tble 1-1 vlues represen he verge vlues over he period 1976-001. V/P is he fundmenl vlue o price rio. 40 ISSN 1916-971X E-ISSN 1916-978

www.ccsene.org/ijef Inernionl Journl of Economics nd Finnce Vol. 3, No. 4; Sepember 011 Tble 1-. Vlue Weighed Reurns for Porfolios Formed Bsed on V/P Rios Pnel A: Ohlson Model P1 P P3 P4 P5 P6 P7 P8 P9 P10 VMG1 VMG R1 0.174 0.166 0.163 0.178 0.191 0.38 0.39 0.1 0.35 0.301 0.18 0.098 R 0.18 0.167 0.174 0.174 0.41 0.196 0.64 0.70 0.7 0.90 0.16 0.133 R3 0.175 0.166 0.161 0.196 0.10 0.191 0.34 0.37 0.51 0.80 0.104 0.095 R4 0.143 0.171 0.17 0.179 0.179 0.49 0.39 0.95 0.75 0.39 0.186 0.145 R5 0.150 0.171 0.194 0.173 0.60 0.08 0.4 0.40 0.193 0.36 0.086 0.054 AVG 0.154 0.168 0.173 0.180 0.16 0.16 0.40 0.51 0.45 0.87 0.133 0.105 ACR5 0.545 0.598 0.611 0.676 0.80 0.84 1.003 0.994 1.031 1.31 0.776 0.604 Pnel B: Felhm-Ohlson Model P1 P P3 P4 P5 P6 P7 P8 P9 P10 VMG1 VMG R1 0.196 0.197 0.181 0.191 0.189 0.184 0.11 0.10 0.188 0.4 0.08 0.010 R 0.184 0.197 0.160 0.03 0.168 0.198 0.03 0.13 0.179 0.147-0.059-0.046 R3 0.7 0.180 0.167 0.159 0.09 0.175 0.15 0.65 0.38 0.14 0.08 0.03 R4 0.176 0.39 0.19 0.185 0.00 0.60 0.31 0.168 0. 0.5 0.036 0.013 R5 0.145 0.174 0.186 0.167 0.00 0.06 0.191 0.50 0.179 0.177 0.017 0.001 AVG 0.186 0.198 0.183 0.181 0.193 0.04 0.10 0.1 0.01 0.197 0.010 0.00 ACR5 0.76 0.768 0.619 0.659 0.715 0.73 0.760 0.771 0.749 0.754 0.09 0.005 Pnel C: Choi e l pproch P1 P P3 P4 P5 P6 P7 P8 P9 P10 VMG1 VMG R1 0.195 0.7 0.17 0.37 0.5 0.50 0.11 0.199 0.185 0.147-0.061-0.049 R 0.36 0.33 0.39 0.59 0.6 0.199 0.183 0.190 0.05 0.131-0.110-0.084 R3 0.305 0.67 0.77 0.61 0.3 0.03 0.198 0.18 0.11 0.14-0.153-0.095 R4 0.35 0.44 0.96 0.1 0.3 0. 0.171 0.05 0.16 0.163-0.096-0.099 R5 0.06 0.6 0.4 0.177 0.18 0.3 0.0 0.199 0.140 0.155-0.044-0.065 AVG 0.35 0.39 0.54 0.31 0.5 0.1 0.193 0.0 0.180 0.144-0.093-0.078 ACR5 0.889 0.976 0.975 0.959 0.867 0.854 0.73 0.757 0.675 0.484-0.49-0.35 Noe: Tble 1- vlues represen men one- o five-yer buy nd hold reurn for porfolios formed on Sepember ech yer, bsed on he fundmenl vlue o price rio (V/P). The smple period is 1976-001. V represens vlue mesures compued by he Ohlson model (using r= 0.05 consn), esimed on indusry bsis. P is he mrke vlue of equiy six monhs fer he fiscl yer end. AR is he verge reurn for R1- R5. CR5 is he five-yer cumulive reurn. VMG1 represens he difference beween porfolio 10 nd porfolio 1. VMG represens he difference beween he verge of porfolio 10 nd 9 nd he verge of porfolio 1 nd. Tble. One Fcor Model for Porfolios Formed Bsed on V/P Rios Pnel A: Ohlson Model P1 P P3 P4 P5 P6 P7 P8 P9 P10 VMG1 VMG -0.0011 0.0003-0.0004 0.0006 0.000 0.003 0.0034 0.0041 0.0040 0.006 0.0073 0.0055 () -0.70 0.8-0.37 0.38 1.59 1.68 1.77 1.83 1.68.34.55.1 0.96 0.94 0.96 0.97 0.96 0.98 1.00 1.01 0.95 0.91-0.05-0.00 ( ) 33.3 4.78 3.76 5.7 30.88 40.40 4.60 14.19 0.68 18.16-1.16-0.63 R 0.80 0.87 0.89 0.86 0.87 0.88 0.81 0.76 0.7 0.64 0.004 0.00 Pnel B: Felhm-Ohlson Model P1 P P3 P4 P5 P6 P7 P8 P9 P10 VMG1 VMG 0.000 0.004 0.0008 0.000 0.0015 0.0004 0.0009 0.0019 0.0011 0.0015 0.0013 0.0000 () 0.1.31 0.55 0.17 1.51 0.30 0.57 1.51 0.71 0.59 0.76 0.14 0.96 0.95 0.99 0.97 0.97 0.98 0.97 0.93 0.95 0.89-0.07-0.04 ( ) 3.59 41.89 7.95 3.04 34.48 4.14 7.94 36.55 3.37 1.5 -.1-1.09 R 0.83 0.89 0.87 0.88 0.89 0.88 0.85 0.88 0.81 0.63 0.011 0.0045 Pnel C: Choi e l pproch P1 P P3 P4 P5 P6 P7 P8 P9 P10 VMG1 VMG 0.0045 0.0038 0.0031 0.0017 0.003 0.0019 0.0007 0.0006-0.000-0.000-0.0065-0.0053 ().89.9 1.74 1.06 1.8 1.36 0.50 0.47-0.13-1.39-3.34-3.05 1.04 0.98 0.98 0.96 1.0 0.97 0.95 0.97 0.95 0.94-0.10-0.07 ( ) 31.54 31.57 1.44.47 38.59 34.1 5.3 40.59 6.43 6.74 -.90 -.1 R 0.85 0.83 0.8 0.85 0.88 0.88 0.87 0.88 0.84 0.80 0.030 0.018 Noes: R i R f = i + i(r m R f ) + e i, Where R i is he monhly porfolio reurn. R f is he monhly Tresury bill re he beginning of he monh. R m is he monhly reurn on he FTSE All Shre Tol Reurn Index. ( ) is he -sisic wih sndrd errors clculed using Whie (1980) correcions. R is djused for degrees of freedom. Hedge reurn (VMG1) represens he difference beween porfolio 10 nd porfolio 1. VMG represens he difference beween he verge of porfolio 10 plus 9 nd he verge of porfolio 1 plus. Published by Cndin Cener of Science nd Educion 41

www.ccsene.org/ijef Inernionl Journl of Economics nd Finnce Vol. 3, No. 4; Sepember 011 Tble 3. Three Fcor Model for Porfolios Formed Bsed on V/P Rios Pnel A: Ohlson Model P1 P P3 P4 P5 P6 P7 P8 P9 P10 VMG1 VMG 0.0014 0.0009-0.0007 0.000 0.0011 0.0014 0.006 0.009 0.008 0.0054 0.0040 0.0030 () 0.94 0.79-0.61 0.13 0.87 1.10 1.73 1.98 1.64 3.4.16 1.80 0.97 0.95 0.96 0.98 0.96 0.98 1.0 1.04 0.97 0.95-0.0 0.00 ( ) 7.3 3.40 4.57 7.0 37.4 47.90 30.14 3.84 8.77 5.14-0.51 0.05 SMB 0.19 0.14 0.11 0. 0.09 0.14 0.41 0.55 0.53 0.80 0.61 0.50 (SMB) 3.8.95.7 4.03 1.68 3.4 6.8 8.09 7.49 1.54 7.99 7.98 HML -0.53-0.10 0.10 0.17 0.6 0.6 0.34 0.46 0.46 0.46 0.99 0.76 (HML) -6.39-1.39 1.35.10 3.63 3.8 4.7 6.4 6.09 6.03 11.14 11.16 R 0.86 0.88 0.90 0.88 0.89 0.89 0.88 0.87 0.84 0.84 0.53 0.5 Pnel B: Felhm-Ohlson Model P1 P P3 P4 P5 P6 P7 P8 P9 P10 VMG1 VMG 0.0013 0.0035 0.0016 0.0005 0.0013-0.000-0.000 0.0010 0.0007 0.001 0.0001-0.0015 () 1.04 3.48 1.3 0.45 1.30-0.16-0.15 0.85 0.49 0.56 0.14-0.8 0.98 0.95 1.00 0.97 0.98 0.99 0.98 0.93 0.97 0.9-0.06-0.0 ( ) 37.98 38.48 5.53.64 35.85 7.47 34.40 41.71 5.93 6.33-1.88-0.78 SMB 0.4 0.19 0.7 0.0 0.13 0.0 0.18 0.06 0.38 0.59 0.17 0.18 (SMB) 7.54 4. 5.06 3.89.31 4.59 3.38 1.38 6.6 5.70 1.59.61 HML -0.13-0.0-0.11-0.01 0.10 0.1 0.3 0.4 0.3 0.7 0.40 0.4 (HML) -1.84-3.34-1.84-0.14 1.56.47 3.67 3.54.88.0 3.1 4.58 R 0.88 0.91 0.89 0.89 0.90 0.90 0.88 0.90 0.86 0.73 0.11 0. Pnel C: Choi e l pproch P1 P P3 P4 P5 P6 P7 P8 P9 P10 VMG1 VMG 0.0044 0.0031 0.007 0.0011 0.0017 0.0013 0.0001 0.0006 0.0008-0.0007-0.0051-0.0037 () 3.8.36 1.73 0.86 1.54 0.93 0.09 0.51 0.61-0.50 -.39 -.04 1.06 1.00 0.99 0.98 1.03 0.98 0.96 0.98 0.96 0.96-0.10-0.07 ( ) 39.58 35.86.9 4.96 47.15 39.93 7.48 4.7 4.04 5.38 -.99 -.56 SMB 0.38 0.34 0.7 0.31 0.19 0.16 0.14 0.17 0.16 0.33-0.05-0.1 (SMB) 7.47 5.78 3.79 4.91 3.15 3.9.37 3.17.75 4.6-0.70 -.08 HML 0.16 0.7 0.17 0.5 0. 0.0 0.18 0.06-0.17-0.19-0.35-0.40 (HML).1 4.45.47 4.56 3.99.47.79 0.9-1.96 -.01 -.98-4.3 R 0.89 0.88 0.84 0.89 0.90 0.89 0.88 0.89 0.85 0.83 0.11 0.19 Noes: R i R f = i + i(r m R f ) + s i SMB + h i HML + e i, Here, R i is he monhly porfolio reurn, R f is he monhly Tresury bill res he beginning of he monh, nd R m is he monhly reurns of he FTSE All Shre Tol Reurn Index. ( ) re he -sisics wih sndrd errors clculed using Whie (1980) correcions. R is djused for degrees of freedom. SMB (smll minus big) is he difference, ech monh, beween he verge of he reurns on he hree smll-sock porfolios (S/L, S/M, nd S/H) nd he verge of he reurns on he hree big- sock porfolios (B/L, B/M, nd B/H). HML is he difference, ech monh, beween he verge of he reurns on he wo high-book-o-mrke porfolios (S/H nd B/H) nd he verge of he reurns on he wo low-booko-mrke porfolios (S/L nd B/L). Hedge reurn (VMG1) represens he difference beween porfolio 10 nd porfolio 1. VMG represens he difference beween he verge of porfolio 10 plus 9 nd he verge of porfolio 1 plus. 4 ISSN 1916-971X E-ISSN 1916-978

www.ccsene.org/ijef Inernionl Journl of Economics nd Finnce Vol. 3, No. 4; Sepember 011 Tble 4. Three Fcor Model for Porfolios Formed Bsed on V/P Rios-Up Mrke Anlysis Pnel A: Ohlson Model P1 P P3 P4 P5 P6 P7 P8 P9 P10 VMG1 VMG -0.0003-0.004-0.0038-0.0045-0.0058-0.0043-0.004 0.0011 0.0009 0.003 0.006 0.0039 () -0.10-1.70 -.13-1.89 -.17 -.00-0.97 0.48 0.34 0.69 0.63 1.4 1.04 1.13 1.07 1.13 1.14 1.1 1.16 1.09 1.05 1.05 0.01-0.04 ( ) 13.69 16.74 1.65 0.67 16.79.50 17.56 19.4 16.30 14.11 0.13-0.39 SMB 0.14 0.17 0.1 0. 0.11 0.17 0.39 0.54 0.55 0.86 0.7 0.55 (SMB).00.90.01 3.41.17 3.58 5.69 7.65 6.97 11.3 8.8 6.86 HML -0.65-0.11 0.06 0.14 0.6 0.33 0.35 0.44 0.45 0.46 1.11 0.84 (HML) -6.73-1.3 0.67 1.40.97 4.18 3.61 5.33 4.1 4.65 1.95 9.85 R 0.65 0.70 0.71 0.68 0.7 0.76 0.71 0.70 0.67 0.70 0.63 0.58 Pnel B: Felhm-Ohlson Model P1 P P3 P4 P5 P6 P7 P8 P9 P10 VMG1 VMG -0.005 0.0017 0.001-0.0061-0.0047-0.0064-0.005-0.0053-0.0037 0.0044 0.0069 0.0009 () -1.0 0.79 0.47 -.64 -.1-3.08 -.15 -.54-1.4 1.07 1.55 0.31 1.09 1.04 1.05 1.17 1.17 1.16 1.1 1.08 1.11 0.8-0.7-0.10 ( ) 19.86 1.8 17.81 18.08 0.77 0.45 18.69 19.36 13.39 7.81 -.1-1.06 SMB 0.36 0.19 0.6 0. 0.3 0.19 0.15 0.10 0.41 0.6 0.6 0.4 (SMB) 5.40 3.53 3.91 3.59 3.3 3.45.53.17 7.51 4.66.07 3.11 HML -0.0-0.5-0.18-0.08 0.08 0.1 0.38 0.30 0.1 0.6 0.46 0.46 (HML) -.33-3.74 -.67-1.15 1.04 1.8 3.64 4.11.41 1.45 3.09 4.68 R 0.69 0.74 0.66 0.73 0.74 0.74 0.70 0.78 0.69 0.40 0.18 0.7 Pnel C: Choi e l pproch P1 P P3 P4 P5 P6 P7 P8 P9 P10 VMG1 VMG 0.004 0.0013-0.004-0.0038-0.009-0.007-0.0054-0.0055-0.0041-0.0034-0.0058-0.0056 () 0.90 0.5-0.9 -.10-1.4-1.1 -.55 -.4-1.55-1.14-1.43-1.80 1.1 1.07 1.14 1.1 1.14 1.09 1.1 1.15 1.1 1.05-0.07-0.01 ( ) 16.17 18.7 1.83 5.4 19.61.46 0.74 18.87 17.54 15.16-0.7-0.08 SMB 0.39 0.37 0.9 0.8 0.17 0.16 0.15 0.1 0.14 0.30-0.09-0.16 (SMB) 7.45 5.46 4.46 4.4.33 3.53.09 3.11.04 3.88-0.9 -. HML 0.0 0.5 0.17 0.8 0.7 0.3 0. 0.04-0. -0.9-0.49-0.48 (HML).19 3.7.35 4.75 3.8.69 3.0 0.54-1.98 -.61-3.71-4.09 R 0.70 0.69 0.68 0.76 0.7 0.73 0.7 0.69 0.65 0.60 0.17 0.5 Noes: R i R f = i + i(r m R f ) + s i SMB + h i HML + e i, R i is he monhly porfolio reurn, R f is he monhly Tresury bill re he beginning of he monh, nd R m is he monhly reurn on he FTSE All Shre Tol Reurn Index. All -sisics re in prenheses wih sndrd errors clculed using Whie (1980) correcions. R is djused for degrees of freedom. The hedge reurn (VMG1) represens he difference beween porfolio 10 nd porfolio 1. VMG represens he difference beween he verge of porfolio 10 plus 9 nd he verge of porfolio 1 plus. SMB (smll minus big) is he difference, ech monh, beween he verge of he reurns on he hree smll-sock porfolios (S/L, S/M, nd S/H) nd he verge of he reurns on he hree big- sock porfolios (B/L, B/M, nd B/H). HML is he difference, ech monh, beween he verge of he reurns on he wo high-book-o-mrke porfolios (S/H nd B/H) nd he verge of he reurns on he wo low-book-o-mrke porfolios (S/L nd B/L). Published by Cndin Cener of Science nd Educion 43

www.ccsene.org/ijef Inernionl Journl of Economics nd Finnce Vol. 3, No. 4; Sepember 011 Tble 5. Three Fcor Model for Porfolios Formed Bsed on V/P Rios-Down Mrke Anlysis Pnel A: Ohlson Model P1 P P3 P4 P5 P6 P7 P8 P9 P10 VMG1 VMG -0.001-0.0046-0.0033-0.003 0.00 0.0019 0.0016 0.000-0.0004 0.003 0.0035 0.0077 () -0.51-1.93-1.6-1.56 1.10 0.97 0.61 0.68-0.13 0.7 1.13 1.46 0.93 0.83 0.90 0.90 0.95 0.95 0.97 1.01 0.91 0.87-0.06 0.0 ( ) 0.58 16.8 13.63 0.48 6.78 38.1 19.45 0.75 18.7 15.33-1.04 0.6 SMB 0.3 0.14 0.14 0.7 0.08 0.13 0.48 0.59 0.51 0.75 0.43 0.40 (SMB) 4.45.17.63 4.08 1.19 1.83 4.3 4.78 4.68 6.55 3.19 4.51 HML -0.31-0.15 0.13 0.17 0.3 0.09 0.9 0.48 0.45 0.39 0.70 0.65 (HML) -3.0 -.09 1.53.34 3.07 1.14.91 4.50 4.3 3.48 4.48 6.86 R 0.88 0.86 0.90 0.90 0.90 0.88 0.87 0.84 0.77 0.80 0.3 0.38 Pnel B: Felhm-Ohlson Model P1 P P3 P4 P5 P6 P7 P8 P9 P10 VMG1 VMG 0.0009 0.000-0.000-0.0010-0.0008-0.0011-0.003 0.00-0.000 0.0050 0.0041 0.0019 () 0.35 0.11-0.79-0.33-0.4-0.45-1.04 1.3-0.07 1.4 0.97 0.61 0.96 0.89 0.94 0.9 0.01 0.94 0.90 0.91 0.93 0.99 0.03 0.04 ( ) 6.79 40.63 15.58 13.06 30.30 15.8 3.15 8.9 14.69 1.84 0.49 0.6 SMB 0.57 0.4 0.33 0.4 0.04 0.7 0.9 0.03 0.37 0.5-0.05 0.04 (SMB) 7.6 4.41 5.05 3.64 0.69 4.30 3.44 0.43 3.80 4.39-0.37 0.40 HML 0.00-0.15 0.003 0.10 0.07 0.18 0.15 0.08 0.3 0.30 0.30 0.34 (HML) 0.19-1.6 0.04 1.38 1.11.8 1.61 0.88 1.86.8 1.75.56 R 0.90 0.89 0.90 0.89 0.90 0.91 0.89 0.89 0.86 0.78 0.05 0.13 Pnel C: Choi e l pproch P1 P P3 P4 P5 P6 P7 P8 P9 P10 VMG1 VMG 0.001 0.0018 0.0019-0.004 0.0014-0.0003-0.00-0.0000-0.006-0.0014-0.0035-0.0040 () 0.86 0.71 0.55-0.9 0.79-0.16-1.01-0.0-0.95-0.46-0.97-1.46 1.01 0.96 0.94 0.88 1.00 0.91 0.88 0.93 0.87 0.94-0.07-0.08 ( ) 6.31 0.7 13.4 15.7 38.01 30.85 17.8 36.03 15.67 15.83-1.17-1.36 SMB 0.40 0.38 0.30 0.4 0.3 0. 0.18 0.16 0.9 0.4 0.0-0.035 (SMB) 3.61 3.7. 3.31.78 3.89.45.7 3.08 4.14 0.17-0.36 HML 0.04 0.7 0.13 0.15 0.1 0.07 0.06 0.05-0.14-0.01-0.05-0.3 (HML) 0.47.75 1.10 1.6 1.4 0.75 0.70 0.78-1.64-0.08-0.34 -.31 R 0.88 0.86 0.79 0.87 0.90 0.89 0.88 0.91 0.86 0.83 0.0 0.09 Noes: R i R f = i + i (R m R f ) + s i SMB + h i HML + e i, R i is he monhly porfolio reurn, R f is he monhly Tresury bill res he beginning of he monh, nd R m is he monhly reurn on he FTSE All Shre Tol Reurn Index. All -sisics re in prenheses wih sndrd errors clculed using Whie (1980) correcions. The R is djused for degrees of freedom. The hedge reurn (VMG1) represens he difference beween porfolio 10 nd porfolio 1. VMG represens he difference beween he verge of porfolio 10 plus 9 nd he verge of porfolio 1 plus. SMB (smll minus big) is he difference, ech monh, beween he verge of he reurns on he hree smll-sock porfolios (S/L, S/M, nd S/H) nd he verge of he reurns on he hree big-sock porfolios (B/L, B/M, nd B/H). HML is he difference, ech monh, beween he verge of he reurns on he wo high-book-o-mrke porfolios (S/H nd B/H) nd he verge of he reurns on he wo low-book-o-mrke porfolios (S/L nd B/L). 44 ISSN 1916-971X E-ISSN 1916-978