A1 Journal article (refereed), original research
Can size-, industry-, and leverage-adjustment of valuation ratios benefit the value investor?

LUT Authors / Editors

Publication Details
Authors: Pätäri Eero, Karell Ville, Luukka Pasi
Publisher: Inderscience
Publication year: 2016
Language: English
Related Journal or Series Information: International Journal of Business Innovation and Research
Volume number: 11
Issue number: 1
Start page: 76
End page: 109
Number of pages: 34
ISSN: 1751-0252
eISSN: 1751-0260
JUFO-Level of this publication: 1
Open Access: Not an Open Access publication

This paper introduces a new and innovative methodology for value portfolio selection by adjusting the conventional valuation ratios on the basis of firm size, financial leverage and industry classification and combining them as single selection criteria. The tercile portfolios are composed of a comprehensive sample of Finnish non-financial stocks based on their adjusted valuation. The performance of portfolios is evaluated on the basis of the average return and several risk-adjusted performance metrics throughout the 1996-2013 sample period. The results show that the suggested multidimensional combination criteria can add value to equity portfolio selection. The outperformance of such top-tercile portfolios in contrast to both the comparable bottom portfolios and the stock market portfolio is statistically significant on the basis of all performance metrics employed. The methodology employed offers an interesting alternative for identifying undervalued stocks by capturing both several dimensions of relative value and several peer-group comparisons at the same time.

Last updated on 2018-19-10 at 08:49