A study of the Norwegian Stock Market, 1961-1989 : characteristics of the Oslo Stock Exchange and an empirical analysis of the price-book anomaly

Abstract

This thesis analyzes characteristics of the Oslo Stock Exchange (OSE) in the time period 1961-1989. Furthermore, this thesis extends the literature concerning the research on the P/B anomaly in the Norwegian stock market by investigating the relationship between the P/B ratio and future realized stock returns. The anomaly is heavily researched in other markets. Similar studies have also been conducted for the OSE after 1980. We extend the research of the anomaly with additional 19 prior years. The analyses are based on a self-assembled data set, supplemented with existing market values and stock prices. Considering the characteristics of the OSE, both the market value and invested capital grew rapidly throughout the observed period. Key indicators, like the debt ratio, return on equity, price-book and price-earnings, have also been analyzed, and we find that the ratios historically reflect market factors and events. In our analysis, we find a significant link between the contemporary P/B and the future long-term stock return. However, when we control for company size (market value), risk (debt ratio), profitability (ROE) and a 5-year lag of the long-term return, the significance diminishes. Further, we identify that the P/B effect can be explained by differences in firm size (the size effect). The similar relationship is researched through a portfolio analysis, where we compare the future return of a portfolio consisting of low P/B firms and the future return of a portfolio consisting of high P/B firms. Despite the equally-weighted low P/B portfolio providing a significantly higher future return, the superior gain disappears when comparing the future return of the value-weighted portfolios. These results provide further support for the size effect.