A comparative study on performance between value and growth stocks at the NSE
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Date
2009Author
Ngacha, Zacharia W
Type
ThesisLanguage
enMetadata
Show full item recordAbstract
For many years, financial researchers and investment analysts have
argued that value stocks outperform growth stocks over time. While a
large body of empirical evidence supports this argument, previous
studies on NSE find no significant return spread between value and
growth stocks. Previous studies on NSE define value stocks as stocks
with extremely high values of B/M or E/P ratios and growth stocks as
stocks with extremely low values of the two ratios. However, according
to empirical evidence, one variable alone may not precisely distinguish
between value and growth stocks because of possible misc1assification
problems.
This study sought to extend the evidence of value-growth spread at the
NSE by using a two-variable dimension that defines value and growth
stocks based on a combination of B/M and E/P ratios. Out of 62 firms
listed on the NSE between 1999 and 2007, 52 firms were sampled for
the study. For each year of study, the sampled firms were ranked into
three groups; top 30 %, middle 40 %, and bottom 30 % on their B/M
values. The firms were also ranked into similar groups on their E/P
values. Intersections of the top 30% firms from the B/M and E/P
rankings formed the value portfolio while intersections of the bottom
30% firms from the two rankings formed the growth portfolio. The two
portfolios were rebalanced annually and their return differential
compared over the study period. Secondary data from NSE was used to
compute the B/M and E/P values; and also to compute portfolio returns.
Findings of the study show that, between 1999 and 2007, value
portfolios consistently outperformed growth portfolios in eight (8) of the
nine (9) the years. The value-growth spread averaged 49.9% annually
over the period. This is much higher than documented value premiums
even in developed markets. A statistical test of the return spread shows
a significant difference in performance between value and growth
stocks.
In summary, the study concludes that in the Kenyan stock market, value
stocks are more profitable than growth stocks. Investors must however
clearly distinguish between value and growth stocks by avoiding use of
simple value-defining strategies.
Citation
Masters of business administrationSponsorhip
University of NairobiPublisher
School of business,University of Nairobi