W. Scott Bauman

Investor Expectations and the Performance of Value Stocks versus Growth Stocks

Investment decision making is often categorized according to style: growth or value. Value stocks are typically characterized as having low P/Es. Studies from the late 1970s conclude that stocks with low P/Es produce positive risk-adjusted returns. Subsequent studies have found positive returns associated with other methods of categorizing a stock as a value stock, such as low price to book value and low price to cash flow. Growth stocks have opposite characteristics, such as high P/Es.

Investor Overreaction in International Stock Markets

Many studies have found that value stocks outperform growth stocks in the U.S. and other international stock markets. Little research has been published that attempts to explain this difference in performance in international markets. The results reported in this article are based on tests of several hypotheses for over 10,000 stock returns in a ten-year period for twenty-one international stock markets. The authors find evidence that investors overreact by driving the prices of value stocks too low. It appears that investors and research analysts tend to assume that past growth rates in earnings per share will continue in the future. Yet evidence shows that extreme past growth rates tend to revert to a normal mean. Consequently, when earnings disappointments are reported, stocks previously considered to be growth stocks tend to produce lower returns than value stocks.

Federal Reserve Monetary Policy and Industry Stock Returns

Recent studies identify stock return patterns associated with changes in Federal Reserve monetary policy. We find that these return patterns prevail across sixteen industry stock indices. However, significant cross-industry variation exists as the apparel industry exhibits mean annual returns that are 50% higher under an expansive Fed policy than under a restrictive policy, while the same return difference for the oil industry is only 20%. This cross-industry variation suggests that monetary conditions may be used by investors to estimate different expected returns across industries. Furthermore, the findings support the view that monetary considerations should be considered in ex ante asset pricing models such as the CAPM. Copyright Blackwell Publishers Ltd 1997.

The Performance of Growth Stocks and Value Stocks in the Pacific Basin

Many studies show that value stock strategies outperform growth stock strategies in U.S. markets and in international markets. However, the evidence is not clear as growth stocks have had higher returns in a few countries. Because the behavior of stock markets vary between different geographic regions, it is possible that the performance of these strategies may differ in the Pacific Rim region. We examine the performance of value stocks and growth stocks, defined on the basis of market price to book value per share, over the 10-year period 1986-1996, for six Pacific Rim countries. Based on over 11,900 annual stock returns, value stocks generally outperformed growth stocks over the 10-year period, and in the various Pacific Rim country stock markets. In addition, smaller cap stocks outperformed large cap stocks. Regardless of cap size, however, value stocks, on the whole, outperformed growth stocks. When growth stocks occasionally outperformed value stocks, the margin of difference tended to be small.

An asset allocation model for active portfolios

76 s M anagers of active investment portfolios 2 frequently attempt To forecast stock market returns in order to decide how to distribute their funds between stocks and fixed-dollar assets. Our purpose in this study is to develop a model that explains stock market returns and that makes fund allocations more efficient. The project has two phases. The first is to design a multiple regression model that might help to explain the annual rate of return of the stock ma,rket. The second is to determine whether a model that reflects this explanation could provide a portfolio strategy indicator that the manager can apply to making asset allocation decisions in an active portfolio. Before developing a new model and trading rules for determining asset allocations, however, we might ask how successfully managers have performed this task in the past. After all, pension fund administrators as a class have been busier than most institutional investors in varying their portfolio asset mix in equities over the years.’ Table I shows the percent of common stocks held in the portfolios of private non-insured pension funds in each of the past 25 years. Although several different factors can account for shifts in asset mix over time, such as changes in pension plan objectives and legal standards, Table I suggests several policy rules, particularly in conjunction with annual stock market returns as measured by the Standard & Poor’s Stock Index. One rule in evidence is a passive policy, which allows the percent of the portfolios in stocks to fluctuate with the stock market cycle. Observe that the z Fi

China: Is Now the Time to Invest?

his article discusses the unfolding investment opportunities in the rapidly developing stock markets of the People’s Republic T of China (PRC), often called Mainland Chna, Communist China, or simply China. Between 1949, when the Communists took over the mainland of China, and 1978, the Chinese economy was managed by the central government under strict controls. Government-owned business corporations handed over their profits to the state treasury and were financed by government budget allocations and loans. Companies never raised capital from private investors. Individuals had no investment opportunities other than bank savings accounts. China’s financial system was characterized by complete nationalization of financial institutions, total suppression of financial markets, and isolation from the world community. All financial institutions that existed before 1949 were merged into the government-owned People’s Bank of China (PBC). With no independent banking system or financial markets, interest rates and exchange rates diverged from competitive, open market rates. By 1978, it became clear to the national leadership that an economy that relied almost exclusively on centralized planning and bureaucratic control had resulted in stagnant productivity, extensive inefficiency, and low morale among the population (see Jao [1990]). Other countries that chose to follow a market-oriented economic strategy (especially the newly industrialized economies of Hong Kong, Singapore, South Korea, and Taiwan) had achieved economic miracles despite the fact that in the early 1950s they were not appreciably better off than China. It was against this background that economic and banking reforms were launched in 1978. The objective of the reform in banking was to create financial institutions and markets capable of mobilizing savings and allocating capital funds in a costeffective way so as to finance sustainable, non-inflationary, economic growth, and to reintegrate China with the world financial system (see Jao [1991]). Since 1979, China has been cautiously relaxing its policy toward foreign banks. In recent years, over forty foreign branches have sprung up, located mostly in Special Economic Zones such as Shenzhen and Xiamen. In 1980, China rejoined the International Monetary Fund and the World Bank; in 1984, China established a formal business relationship with the Bank for International Settlements; and in 1986, China joined the Asia Development Bank. Participation in these international organizations and the willingness to observe international obligations ended

The dynamics of neglect and return: Comment

Richard 1. Dowen and W. Scott Bauman T L he excess returns that appear to belong to neglected firms and firms with high earnings yields have been the subject of much investigation. Arbel (1983 and 1985), Basu (1977), and Reinganum (1981) are among the leading researchers in this area. More recently, Edelman and Baker (1987) produced a study for this journal, reporting that a stock’s excess returns virtually disappear when the stock is owned by more than eight institutions. Further, they report that the earnings price ratio is a function of institutional holdings, going on to infer that, once a stock is held by more than eight investors, a measurable earnings yield anomaly would no longer exist. The purpose of this note is to investigate whether there is an excess return to high earnings yield stocks that are held by more than eight institutions. If an anomaly continues to exist for widely held firms, then the EP ratio effect is distinct from the institutional holding effect. Note that establishing a distinct effect differs from arguing that EP ratios and institutional holdings have no relationship. Edelman and Baker show that such a relationship exists. We ourselves (1986) also found a1 low but significant correlation between neglect and EP ratios. When we say that there is a distinct efflect, we are merely saying that, after one effect is accounted for, the other continues to be present. We chose our methodology with the specific purpose of making our results directly comparable with those found by Edelman and Baker. We selected a sample of 200 firms, using two criteria. First, the firrn hail to be listed continuously on the CRSP Daily Rei urns File from January 1,1980, through December 31,1984. Second, according to information in the Standard & F’OOY’S Stock Guides, each firm had at least twelve institutional holders in January of 1980 and December of 11984. We chose the number twelve because twelve is the number Edelman and Baker used to judge whether a firm had moved from the neglected category to the non-neglected category. Thus, ali the firms in the sample are non-neglected. After the sample was selected, we calculated quarterly returns for each firm using the CliSP Daily Returns File. Quarterly earnings yield data were taken from the COMPUSTAT Quarterly Intlustrial Tape. We then divided the sample into earnings yield quintiles and calculated the quarterly average portfolio return and standard deviation for each quintile. The results of the calculation appear in Table 1. Table 1 shows that there is a monotonic earnings yield anomaly within the group of non-neglected stocks. To confirm this result, we calculated quarterly excess returns using the Edelman and Baker definition: