Characteristics of a Global Stock Winner

Alexander Eberhard & Mathias Schinnerup Hejberg

Student thesis: Master thesis


This thesis seeks to challenge the Efficient Market Hypothesis (EMH) and the Capital Asset Pricing Model (CAPM) by identifying equity investment strategies that appear to generate excess riskadjusted returns. The methodology is a modified version of the approach described in Marc Reinganum’s article Anatomy of a Stock Market Winner (1988). Our research design addresses various shortcomings in Reinganum’s approach while utilizing a newer, more geographically diverse dataset. Our main procedure comprises three steps. First, we analyze historical return data for stocks in the Stoxx Global 1800 index to identify cases in which individual stocks have offered either exceptionally high or exceptionally low returns within a one-year time frame. Second, inspired by previous research suggesting similarities between winner and loser stocks, we use statistical means to identify characteristics that distinguish winners from losers prior to the abnormal rise or fall in the stock price. Third, in order to validate that the findings can be used to beat the market, we test several investment strategies based on buy signals for stocks that meet the criteria of winners in various time periods, including out-of-sample periods. In a dataset covering the period 2001 to 2019, we identify 728 winner stocks and 138 loser stocks. 9 market-based, and/or accounting-based parameters are found to be significant predictors of whether a stock is a winner or a loser. When testing investment strategies based on the identified criteria, we find that buy signals based on a combination of decreasing WACC, increasing free cash flow, and price-to-sales below 1 tend to generate significant excess returns. We discuss the validity of the results and suggest possible explanations in light of various theoretical perspectives, including behavioral finance. We conclude that the results should be interpreted with caution but may reflect the possibility of generating excess risk-adjusted returns on a systematic basis. The results also challenge CAPM, as it cannot be ruled out that the results reflect a weakness of beta as a risk measure. Finally, we conclude, based on sub-analyses of industry and country effects, that investment strategies should account for industry-specific and country-specific differences.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final ThesisMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
Publication date2021
Number of pages129
SupervisorsThomas Plenborg