Contrarian Investment Strategies in a European ContextBrouwer, I.; van der Put, J.; Veld, C.H. Publication date: 1996Link to publication Citation for published version (APA):Brouwer, I., van der Put, J., & Veld, C. H. (1996). Contrarian Investment Strategies in a European Context. (CentER Discussion Paper; Vol. 1996-36). Tilburg: Finance. General rightsCopyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights.-Users may download and print one copy of any publication from the public portal for the purpose of private study or research -You may not further distribute the material or use it for any profit-making activity or commercial gain -You may freely distribute the URL identifying the publication in the public portal Take down policyIf you believe that this document breaches copyright, please contact us providing details, and we will remove access to the work immediately and investigate your claim. CONTRARIAN INVESTMENT STRATEGIES IN A EUROPEAN CONTEXT AbstractIn this paper we study value strategies for four European countries (France, Germany, the Netherlands and the United Kingdom). We find an outperformance for all four value variables which are investigated: the earnings-to-price (E/P) ratio, the cash-flow-to-price (CF/P) ratio, the book-to-market (B/M) ratio and the dividend yield. This outperformance is especially remarkable for the CF/P ratio, which amounts to 20.8% between the top and bottom quintiles in an univariate model. In a regression analysis, in which all four value variables as well as a correction for the size effect are taken into account, we find a difference of 11.8% for the CF/P ratio. We demonstrate that this result can not be explained by risk differences alone. Our findings confirm the outperformance of value strategies as found earlier by Chan, Hamao and Lakonishok (1991) and Lakonishok, Shleifer and Vishny (1994) for Japan and the United States respectively.

Contrarian Investment Strategies in a European ContextBrouwer, I.; van der Put, J.; Veld, C.H. Publication date: 1996Link to publication Citation for published version (APA):Brouwer, I., van der Put, J., & Veld, C. H. (1996). Contrarian Investment Strategies in a European Context. (CentER Discussion Paper; Vol. 1996-36). Tilburg: Finance. General rightsCopyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights.-Users may download and print one copy of any publication from the public portal for the purpose of private study or research -You may not further distribute the material or use it for any profit-making activity or commercial gain -You may freely distribute the URL identifying the publication in the public portal Take down policyIf you believe that this document breaches copyright, please contact us providing details, and we will remove access to the work immediately and investigate your claim. CONTRARIAN INVESTMENT STRATEGIES IN A EUROPEAN CONTEXT AbstractIn this paper we study value strategies for four European countries (France, Germany, the Netherlands and the United Kingdom). We find an outperformance for all four value variables which are investigated: the earnings-to-price (E/P) ratio, the cash-flow-to-price (CF/P) ratio, the book-to-market (B/M) ratio and the dividend yield. This outperformance is especially remarkable for the CF/P ratio, which amounts to 20.8% between the top and bottom quintiles in an univariate model. In a regression analysis, in which all four value variables as well as a correction for the size effect are taken into account, we find a difference of 11.8% for the CF/P ratio. We demonstrate that this result can not be explained by risk differences alone. Our findings confirm the outperformance of value strategies as found earlier by Chan, Hamao and Lakonishok (1991) and Lakonishok, Shleifer and Vishny (1994) for Japan and the United States respectively.

INTRODUCTIONIn finance literature, a number of stock market anomalies have been documented. Banz (1981) found that smaller firms produce higher stock returns than can be expected from the Capital Asset Pricing Model (CAPM). Basu (1977 and1983) and Reinganum (1981) documented a negative relation between price/earnings (P/E) ratios and CAPM predicted returns. Another well-known stock market anomaly is the overreaction effect found by De Bondt andThaler (1985 and1987). Besides that, also seasonal effects have been found in stock market returns. Hawawini and Keim (1995) give an extensive overview of these anomalies.Some of the anomalies fall under the general category of contrarian investment strategies. According to Chan (1988) a contrarian stock selection strategy consists of buying stocks that have been losers and selling stocks that have been winners. The reason for the attractiveness of these strategies is grounded in psychology. Kahneman and Tversky (1982), in a study on experimental psychology, find that people tend to overreact to unexpected and dramatic events. De Bondt and Thaler (1985) apply this result to the stock market and find that it is possible to earn excess returns by investing in stocks that have done extremely poorly in past years. Recently another variant of the contrarian strategy has received much attention, i.e. the outperformance of value strategies. These strategies, which were already advocated by Graham and Dodd in 1934, call for buying stocks with low prices relative to value measures such as earnings, cash flows, book values or dividend yields. Studies for the United States and Japan have shown that value strategies produce superior returns. In this paper we will show that this is also the case for four