Value Versus Growth: Australian Evidence

Abstract

Fama and French (1992) and Lakonishok, Shleifer and Vishny (1994) show that value stocks earn substantially higher returns than growth stocks. Barbee, Mukherji and Raines (1996) and Leledakis and Davidson (2001) show that the ratio of sales-to-price and debt-to-equity are better predictors of average equity returns than book-to-market equity and firm size. In this paper, we evaluate the ability of size, book-to-market, sales-to-price, cash flow-to-price, earnings-to-price and debt-to-equity in explaining the cross-sectional variation in equity returns. Our findings show that sales-to-price, earnings-to-price and cash flow-to-price are highly significant in explaining cross-sectional variation in equity returns. However, book-to-market emerges as the best predictor of average equity returns, displaying the highest level of significance in joint regressions. In summary, we document that book-to-market is the best predictor of equity returns in Australia and thus is the best proxy for value/glamour.

Keywords: Multifactor Model, Book-to-market equity effect, Size effect

JEL Classification: G10, G11, G12, G15