Firm-Specific Variables and Expected Stock Returns - A study on the German Market -
Sammanfattning: Purpose: The purpose of this thesis is to investigate which firm-specific variables can explain the cross-section of expected stock returns in the German market. The tested explanatory variables are market beta, firm size, the book-to-market ratio, the earnings-to-price ratio, leverage, the dividend yield, the cash flow-to-price ratio and sales growth. Furthermore, the thesis also examines the conditional version of the beta. Methodology: This thesis uses the cross-sectional regression approach by Fama and MacBeth (1973) along with the portfolio approach of Fama and French (1992). Furthermore, it makes use of the conditional beta approach developed by Pettengill, Sundaram and Mathur (1995) and adjusts its estimated betas for non-synchronous trading using the Aggregate Coefficients Method of Dimson (1979). Empirical Foundation: This thesis uses 300 non-financial firms listed in Prime and General Standard of the Frankfurt Stock Exchange. The data from 2004 - 2014 was gathered through Datastream. The testing period is the post-crisis period, reaching from July 2009 to June 2014. Conclusion: This thesis comes to the conclusion that value investing pays out in the German market. More specifically, investors should pay attention to the book-to-market, the earnings-to-price as well as the cash-flow-to price ratio. A model containing beta, the book-to-market ratio and the cash flow-to-price ratio proves to be the best one to explain expected returns. Also beta should be looked at when making one’s investment decision since the conditional beta coefficient proves to be positive and significant in up markets and negative and significant in down markets. Size, leverage, the dividend yield and sales growth are not significant and therefore are not considered to be proxies for risk in the German market.
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