AN EMPIRICAL STUDY OF THE PRICE TO BOOK VALUE EFFECT IN THE SINGAPORE STOCK MARKET

Abstract

A growing body of literature has examined and noted significant anomalies in the form of empirical regularities in security returns. These phenomena contradict the well established paradigms of finance and puzzled the financial economists. Their desire to explain these phenomena has resulted in increasing interest in studying more anomalies in markets with different institutional, regulatory and tax environments. To contribute towards this field of study, this Academic Exercise seeks to investigate five anomalies on the Stock Exchange of Singapore, which includes price to book value ratio, firm size, price level, book value and seasonality effects. Evidence shows that stocks that exhibit high returns either have low price to book value ratio, low price or high book value. However, after adjusting for risk, these factors become irrelevant. In other words, the three effects could not be detected when the risk-adjusted excess returns are studied. Unlike other stock markets, firm size and seasonality effects are absent on the Stock Exchange of Singapore. A possible explanation for the result documented is that beta correctly measures risk and the market is efficient. This implies that investors in Singapore can only earn returns that commensurate with the degree of systematic risk.