An Evaluation of the Investment Strategy Based on Book-to-Market Ratio and Other Financial Indicators

Abstract

This work aims at refining and complementing the analysis of portfolios composed of commercial papers from companies with high Book-to-Market ratio, which were dealt in BOVESPA from 2004 to 2008, through the creation of an one-dimensional variable, called F_total. It synthesizes data from financial indicators of companies’ liquidity, profitability and gearing. The adoption of such evaluation strategy can also be characterized as a value investing strategy. The idea is to compare companies’ performance not only based on BM ratio, but also drawing attention to their financial performance. Furthermore, this work tries to identify which are the determinants of returns from high BM companies by using the pooled Ordinary Least Squares (OLS) method. In summary, the results show that high and low BM shares returns are statistically the same and that the use of refining based on financial indicators is not enough to identify which shares have the highest returns in the Brazilian market. The results obtained from the test are corroborated by the statistical insignificance presented by the variable F_total in the model estimated by pooled OLS.

Keywords: Investment Strategy, Book-to-Market, Brazil

JEL Classification: G2