Investigating the relationship between company size, the ratio of book value to market value and the volume of transactions with momentum and reverse profits in the Iranian capital market

Dissertation for Master's Degree

Major: Accounting

Abstract:

Several studies have proven that stock returns perform differently in different short-term, medium-term, and long-term time horizons. Two important and widely used strategies among analysts, portfolio managers and other investors in the current capital markets of the world are the reverse strategy and the momentum strategy. In both of these strategies, which are exactly opposite to each other, they try to predict future performance and create additional efficiency by using past performance. That is, securities that have experienced good (bad) performance in the past tend to continue this good (bad) performance in the future. While the existence of momentum in stock returns has been proven, and despite the fact that the usefulness of momentum is not so controversial, the exact drivers of this effect remain as an empirical question, and the issue of what factors can be the exact drivers of momentum is not clear.

In this research, using the financial information of 70 companies admitted to the Tehran Stock Exchange during the years 1380-1387, the relationship between momentum and inverse profits with size and value ratio Book value of the company's market value and the volume of the company's transactions have been investigated using multivariate regression models based on combined data. The research findings indicate that there is no significant relationship between company size and momentum profits, and there is no significant relationship between company size and reverse profits except for the 24-month holding period. There is no significant relationship between the ratio of book value to market value (BV/MV) and momentum profits in all periods of maintenance and formation, but there is a significant relationship between the ratio of book value to market value (BV/MV) and reverse profits in all periods of maintenance and formation except for periods of maintenance and formation of 6 months. Regarding the volume of the company's transactions, it can also be said that there is a significant relationship between the volume of transactions and profits of momentum in the periods of 6 months of formation and maintenance and this relationship in the 12 periods And 24 months of formation and maintenance is not significant, while there is a significant relationship between the volume of the company's transactions and reverse profits in 24 months of formation and maintenance. And there is no significant relationship in the 6 and 12 month formation and holding periods.

Keywords: momentum profit, reverse profit, winning stock, losing stock, size, ratio of book value to market value, volume of transactions.

Chapter One

General Research

1-1 Introduction

  In the efficient capital market, the flow of information with high volume regularly enters It has persisted and investors react rationally to new information. The rational reaction of investors causes the price of securities to be adjusted to reach the real values ??[1] (intrinsic). The people involved in the market cannot rely on past information or their personal skills to get more returns from the market, and because information enters the market randomly; It is not possible to predict the price trend of securities even in the near future. Therefore, investors cannot increase their investment returns by using a specific investment strategy such as "momentum" [2] and "reverse" [3] relative power investment strategies, in such a market, using a specific investment strategy to identify profitable investments will fail. The studies conducted in recent years have challenged many assumptions of modern financial theory, one of the most challenging observations in financial markets is that, unlike the efficient market hypothesis [4] which is the basis of many theories presented in modern financial theory, the return of ordinary shares has a special behavior in different time frames and individual investors can obtain more returns than the market return without bearing more risk and only by applying the appropriate investment strategy.In most stock markets of the world, researchers have conducted extensive studies on the effectiveness of various investment strategies. Currently, in the capital markets of the world, two trading and portfolio management strategies that are widely used and their usefulness in creating additional returns have been confirmed in numerous studies are the momentum and reverse strategies. These strategies are opposed to the efficient market hypothesis, so verifying the usefulness of these strategies and considering the effective factors in explaining these strategies can create a fundamental challenge to the modern financial theory and the discussion of market efficiency. 2-1. Study history

A rich and considerable literature on the ability to predict cross-sectional stock returns based on past returns has been documented in the financial literature.

Jigadish and Titman (1993) reported that the strategy of buying winning stocks [5] and selling losing stocks [6] in the past can generate significant additional returns. They discovered this result based on the formation of portfolios based on past returns in the period 1965-1989. Their method was that they classified stocks into ten deciles based on the past three to twelve months' returns, and then formed ten portfolios with equal weight, and set their strategy to buy the winning deciles and sell the losing deciles, and showed that additional returns were created (Jigadish and Titman [7], 1993, p. 89).

Conrad and Cole (1998) with the success of a long-term study in the United States reversed strategy reported in the long term and the momentum strategy in the short term. They stated that the success of these strategies depends on the target horizon. While the momentum strategy was beneficial for a medium-term period of three to twelve months, the reversal strategy was suitable for a short-term weekly or monthly period or a long-term horizon of three to five years. They argued that momentum profits arise only because of cross-sectional differences in expected returns rather than the time series pattern of returns. They argued that momentum gains could be a byproduct of some stocks becoming riskier due to a series of unknown risk factors. In other words, if additional returns are created due to higher (lower) unknown systematic risk, then stocks will reach this higher (lower) range in the future. With this attitude, other gains of momentum are compatible with the discussion of efficiency and the contradiction disappears. (Conrad and Cole,[8] 1998, p. 489).

The recent findings of Jagadish and Titman (2001) criticize this hypothesis (Conrad and Cole). They argue that if momentum gains are due to cross-sectional differences in returns, then past winners (past losers) should continue their higher (lower) returns indefinitely into the future. But they concluded that the return of momentum portfolios (winners minus losers) is positive only for the first twelve months after the formation of the portfolio, and if nothing special happens, the return after twelve months is negative (Jagadish and Titman [9], 2002, pp. 265-243).

Markowitz and Greenblatt (1999) discovered a strong and stable momentum effect among industries. They showed that the strategy of buying past winning stocks and selling past losing stocks is beneficial even after controlling for effect size, ratio of book value to market value, momentum of individual stocks and dispersion in average returns. Winners perform better than loser portfolios and showed that the persistence of returns is inversely related to the size of the company (Raven Horst[11], 1998, p. 267).

De Bont and Thaler[12] (1985, 1987) proved the existence of a reversal or price reversal in the stock price in the long term and suggested that buying past losers and selling past winners can lead to excess returns. They showed that historical losers outperform historical winners. Greenblatt and Titman (1989) discovered additional profits using the momentum strategy, but observed that momentum profits disappear in the first year after the portfolio is formed (Greenblatt and Titman [13], 1989, p. 394). Stein [14] (1999) hypothesized that momentum arises from the gradual release of firm-specific information.