University of Twente Student Theses


The performance of value vs. growth stocks during the financial crisis

Hoekjan, Robin (2011) The performance of value vs. growth stocks during the financial crisis.

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Abstract:This study examines the performance of value and growth stocks during the financial crisis of 2007-2010 within the five most influential markets worldwide and on a global scale. Value stocks are those stocks that trade at low prices compared to the fundaments of the company whereby growth stocks are those stocks that trade at high prices compared to the company’s fundaments. In this thesis, portfolios of value and growth stocks are created in the five most influential countries worldwide (United States, Germany, France, China and United Kingdom). Additionally, these five countries are combined to construct global value and growth portfolios. The performance of value and growth stocks are studied by means of value and growth portfolios, which are constructed on the basis of price-to-earnings, price-to-book and price-to-cash flow. The data to calculate these price-multiples are derived from the income statement, balance sheet and statement of cash flow of the companies within the five indices up to four years. Data on stock quotes, quotes of indices, cash dividends and risk-free rates are derived from,, and To classify stocks to be included in value or growth portfolios, a 30 percent cut-off is used. The performance to study is separated in total return and (systematic) risk. Besides return and risk, price-multiples are studied as well to research whether one price-multiple provide higher return than others. Total return and risk-adjusted measures are studied by means of average and median monthly returns to scrutinize which class of stocks, value or growth, provided the highest return. Finally, a regression analysis is performed to study whether the CAPM and a two-factor model can explain the excess returns made by value and growth portfolios. My findings are as follows; the results obtained from individual countries are invalid to derive statistical meaning and conclusions and are therefore obliterated from discussion. This invalidity can be assignable towards small sample sizes. However, on a global scale, there exist a positive value-growth spread for at least two of the three price-multiples on which value and growth stocks are classified. This means that value stocks provide a higher total return than growth stocks. However, the results are too small and statistically insignificant to insinuate the existence of a global value premium. While value stocks, as compared to growth stocks, also provide a fraction of higher return per unit of risk, as measured by Jensen’s Alpha and Treynor, these results are statistically insignificant as well. Statistical significance could only be found in the first year of the financial crisis and only for Jensen’s Alpha. Second, the study regarding the examination of price-multiples shows that value and growth portfolios classified on P/B does not provide higher returns but are frequently lower compared to portfolios classified on P/E and P/C, which suggests that classification according to P/B is a poor classification tool for constructing value and growth portfolios. Finally, regression analyses show that both the CAPM and two-factor model can explain the excess returns on global value and growth. Moreover, the estimates on alpha in the CAPM are higher for global value portfolios and equal to the estimates on alpha in the two-factor model. However, the slight improvement on the intercept for global value portfolios by the two-factor model is suggested to be assignable towards the existence of a positive value-growth spread. However, due to the statistically insignificance of a value premium, the difference in intercepts are considerably small. Additionally, the beta coefficients of value stocks are a fraction higher than growth stocks, which is consistent with the general theory that higher betas found in stocks should, by definition, produce higher returns. A higher faction in value betas found during the financial crisis expresses itself in a fraction of higher return. Moreover, this also suggest that the reason behind the fraction of outperformance by value stocks over growth stocks is a compensation of risk rather than the behavioral explanation of investor biases. While value and growth stocks are studied during the financial crisis of 2007-2010, some limitations and implications for future research exist. One major limitation concerns the sample size used in this thesis. In this thesis, the five most influential indices are studied, which consisted out of 187 companies. Therefore, stating (statistical) conclusion would be unreliable and makes it difficult to generalize towards other countries. Another limitation in this study is that the statistical tests concerning the difference between returns produced by value and growth stocks only give suggestions regarding market opportunities and not whether one particular trading strategy would be more profitable over another. A final limitation is the degree of survivorship bias due to databases used. While respectable databases, such as CRSP and Compustat preserve stock quotes of delisted companies in file, free extended databases delete stock quotes of delisted companies subsequent towards delisting. Moreover, there also exist a number of implications for future research on value and growth stocks. First, the inclusion of the present value of growth opportunities should be studied to determine whether under and overvaluation exist within value and growth stocks. A second implication of future research is to construct portfolios using the value-weighted approach to determine the influence on the value premium during the financial crisis of 2007-2010. A third implication is what factors influence the investor’s decision making and behavior towards the mental creation of over and undervaluation. A final implication concerns the inclusion of financial institutions and financial conglomerates within value and growth stocks during the financial crisis to determine the influence these companies have on the value premium.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
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