Relationship between ‘risk’ and stock returns Mayur Agrawal Varun Agrawal Debabrata Mohapatra Sung Kyun Park Vikas Yadav

Risk 4: Price to Book Ratio P/B = Market Cap / Book Value of Equity Market Cap = Shares Outstanding * Market price per Share BV of Equity = BV of Assets – BV of Intangible Assets – BV of Liabilities

Compares market’s valuation of company to the value of company indicated by its balance sheets Low P/B ratio => Company undervalued => More Return Value Investors v/s Growth Investors

P/B Calculation CRSP data for Market Cap – Permno as primary key which tracks security COMPUSTAT data for Book Value of Equity – GVKey as primary key which tracks company Mapping between Permno and GVKey is not one to one

Permno  GVKey Used CCM (CRPS COMPUSTAT Merged) to get the mapping between permno and gvkey Steps: – Get gvkeys of all SnP500 constituents from 1962 to 2008 – Get data for all gvkeys from CCM with fields gvkey lpermno (same as CRSP permno) effective start date effective end date

Permno  GVKey (conti…) – The previous step gives GVKey  Permno mapping Process it to get Permno  GVKey – Permno mapped to (Eff Begin Date, Eff End Date, GVKey) tuples EX:

Issues with the Mapping – Using CCM could only get 1450 permno as compared to 1526 in CRSP – The permnos that are present in the mapping can also have some data missing Proposed Solution – Manually finding the mapping of the missing 76 securities (last resort) – Use Ticker information to write a program to complete the mapping (investigating)

Results Dec 1999 Dec 2001 Dec 2002

Growth stocks have high P/B ratio because – Market’s evaluation is more that companies value Technology Sector has high P/B ratio because – Intangible assets like intellectual property rights etc. are of much more value – Intangible asset is a negative term in the denominator Dot com Bubble (till mid 2000) and Burst (2001 and 2002)

Dec 2006 Dec 2004 Dec 2005 Dec 2003

Dec 2008 Companies with low p/b ratio tend to perform better