Value Investing on the Nordic Stock Markets: Can a Superior Return be Found?

Frederik Holmer Welcher & Mads Skovsbo Heidtmann

Student thesis: Master thesis


Value investing origins from Benjamin Graham and David Dodd in 1934 who first described an investment strategy that with the use of key figures can identify undervalued stocks that an investor can exploit to gain a superior return. This thesis continues the wide range of studies that have since Graham and Dodd (1934) investigated the return of a Value Investing strategy. Our analysis contributes to the existing literature by investigating a Value Investing strategy that invest long in value stocks on the Nordic market. The strategy sorts stocks on fundamental figures, that is proved to have explanatory power in identifying stocks that are wrongly priced in the market. We measure the performance of our purposed strategy by measuring the alfa values in a CAPM regression based on data from a 20-year timespan on the Nordic stock market. Our methodology is based on existing literature. Initially we find that single-factor strategies based on either Book-to-market (B/M) or Price-earnings (P/E) yields a positive return premium but lacks statistical significance. When using a combination of the two ratios in a double-factor strategy, we find a higher return premium that proves to be statistically significant. Past studies have discussed the potential of bias in the fundamental figures used for Value Investing, stemming from differences across industries. The thesis investigates this and finds that industry classifications can be used to optimize our single-factor Value Investing strategies. The thesis further investigates whether simple financial statement analysis can be used to optimize a Value Investing strategy. Our analysis is based on the studies made by Piotroski (2002) that investigate whether separating winner-stocks from looser-stocks in a value portfolio can increase the return of the value strategy. We find that an aggregated performance-signal based on a simple financial statement analysis, optimizes the return premium of a B/M strategy on the Nordic market. In conclusion, our analysis finds that a significant return premium has historically been present on the Nordic stock market and that our results points to a persistent return premium on the Nordic market. In closing, the thesis discusses how these results can be explained by using traditional finance theory and behavioral finance theory. By using the Fama & French (1993) 3-factor model to explain the results of our best performing strategies, we find that higher systematic risk cannot explain the return premiums. This contradicts the traditional finance theory. Using behavioral finance theory, we argue that Value Investing can be explained as a long-term investment strategy. The theory points to the fact that irrational behavior from naive investors create behavioral risk and sets limits to arbitrage for sophisticated investors. The behavioral risk and the limits to exploiting the high return premium seems to diminish over time. This creates an opportunity for a long-term value investor to exploit the proposed strategies in this thesis. We argue that the behavioral finance theory presents an adequate explanation to the results found in this thesis.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2018
Number of pages124
SupervisorsSøren Plesner