investment appeal of

student Naruchit T. ID 12(A. Chandra & A. Reinstein)

Small Growth stocks

Keywords:

Small cap companies,

mean reversion,

Forbes’ financial filters

Outline

lit. Intro & why This article? why

lit. review & hypotheses

findings

research design

conclusions

IS contribution & plan

hypo

design

find

conclu

plan

• good ? to invest in “ Best small cap. companies ” list

• How about return compare to risk ?

intro & why press suggest

investors love growth

Before

After !!

Keywords

Small,

mean reversion,

Forbes

review

review

• Peters(1982) large cap

.

• Solt(1989) inverse

• Bauman(1997) overestimate, mean reversion tendency

• Bannister(1990) mean reversion

• Cook(1984) overlooked small cap

• Clayman(1987) overestimate• Huberman(1987) response differently

• Chan(1991) determine risk of small stock, not seem higher return

• Chan(1985) risk & changes in risk premium

rev (cont.)

• Kou(2002) mean reversion boom & burst, Bauman(2002) “hot” Business Week positive excess returns pre but negative later, due to decline several years of performance and market

• Fama & French(2007) convergence process

• Anderson(2005) risk-adjusted returns

• Jun(2008) reversion of focused value & small-cap

• Lander's (2006) Forbes consistent Bauman(2002)

• Yu(2010) 1985–2006 annual list “hot growth companies”, underestimate before but later overestimate

hypotheses

some prior suggest underperformance but investors continue invest, evidence on small companies is unsettled and often contrary

examines small growth stocks by analyzing theinvestment appeal of Forbes' annual list of best small companies,extent of mean reversion, and if Forbes' criteria sufficient

motivate to examine: invest in small?, mean reversion?, buy stocks in list?

null hypothesis, we expectinsignificant abnormal return

design

Methodology

• Forbes: four filters then rank: sales, stock price, ROE, profit margin

• supplement 13 financial variables

Data description

Averaging returns within each event period for three windows (pre-36 months, announcement month andpost-36 months, total 73-month)

excess returns abnormal returns

findings

findings (cont.)

conclusions

This study differs from Lander(2006), not completely support Business Week results because: (1) 13 additional financial variables; (2) abnormal returns (versus excess returns in Lander,2006)

Possible reasons for mis-pricing1.post earnings announcement drift (Bernard, 1989; Foster, 1984) 2.accrual anomaly (Sloan, 1996)

Collins(2000) hedging portfolio exploiting both forms of mispricing generates abnormal returns

significant abnormal & excess return, suggests mean reversion

contri.& plan

Beware of “ ” small growth stocks in Forbes.

small stocks' perform well only Forbes’ filters, but does not hold up on 13 additional variables, some measurements sharply drop more than halved. These results suggest that Forbes' financial filters may only represent partially stock performance.

This confirmation of “mean reversion”, possible explanation is Forbes has caught young stars in their prime, since every firm has a life cycle.

future research should develop segregate strong from weak small growth companies.

Given the differences between applying Forbes filters and 13 additional filters,

contri.& plan

replication in Thai Stock Market

- analyzing performances of “ Money & Banking best small stocks ”, using pre- and post-publication test mean reversion.

- use both returns and financial performance based to examine small growth stocks’ investment appeal.

Independent Study Plan

1.Stat. Software : Eview2.Source of Data: Compustat, Thai Stock Exchange 3.TimelineOctober : develop proposal November: gather dataDecember: test hypo., conclude, proposal