Assessing the Explanatory Power of Book to Market Value of Equity Ratio (BTM) on Stock Returns on Ghana Stock Exchange (GSE)
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Date
2012-06
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University of Ghana
Abstract
The objective of this research was to assess the explanatory power of Book-To-Market value
of equity ratio (BTM) and firm size on portfolio returns in Ghana. This study also sought to
compare the strength of BTM to size in explaining returns. The last objective was to measure
the efficiency of Fama and French (1992) Three-Factor Model on the Ghana Stock Exchange
(GSE) over the period January 1997 to December 2009 and to compare the Three-Factor
Model to the Capital Asset Pricing Model (CAPM).
The sample includes only non-financial firms that traded on the Ghana Stock Exchange over
the test period. The sample size increased from eleven (11) non-financial firms in 1997 to
twenty-one (21) non- financial firms in 2009. Each year, six Size-BTM sorted portfolios are
formed namely; Big-High (BH) portfolio which consist of stocks with big size and high BTM
ratio, Big-Medium (BM) portfolio which contains stocks with big size but medium BTM
ratio , Big-Low(BL) portfolio which consist of stocks with big size and Low BTM ratio,
Small-High (SH) portfolio which contains stocks with small size and high BTM ratio, Small-
Medium (SM) portfolio contains small size and medium BTM ration whilst Small-Low (SL)
portfolio contains stocks with small size but low BTM ratio.
This research found out that, CAPM alone could not predict portfolio returns and that by
adding the two other factors, namely the size effect and the book-to-market ratio effect, to the
CAPM to derive the Fama and French (1992) Three- Factor Model improves the efficiency of
the explanation. It was therefore concluded that The Fama and French Three - Factor Model
consisting of Beta, BTM and firm size could explain risk in portfolio return better than the
beta alone as contended by the traditional CAPM. This study also identified that BTM effect
was stronger on the Ghanaian market than the size effect as identified by Fama and French
(1992) on the US market.
Description
Thesis (MPHIL) - University of Ghana, 2012