BOOK TO MARKET STRATEGY REVISITED: EMPIRICAL STUDY ON JAKARTA STOCKS EXCHANGE By Widita Rarasati 19004115 Undergraduate Program School of Business and Management Institut Teknologi Bandung
BOOK TO MARKET STRATEGY REVISITED: EMPIRICAL STUDY ON JAKARTA STOCK EXCHANGE Widita Rarasati 19004115 Date of Final Examination: August 7, 2007 Date of Graduation: October 27, 2007 Undergraduate Program Institut Teknologi Bandung, 2007 Advisor: Deddy P. Koesrindartoto Ph.D ABSTRACT Nowadays, Indonesian Capital market has been growing rapidly. Many theories exist among the academician and investors. Fama and French (1992) made an influence paper according to capital market theory. They disposed many academics thinking on Capital Asset Pricing Model and Efficiency Market hypothesis. Fama and French stated that market risk (beta) did not enough to explain expected return; there are some factors that influence it, such as size and book to market. Therefore, they are proxy for systematic risk which implied that small firm and high book to market should have higher return than big firm and low book to market. This statement and finding also became evidence against efficient market hypothesis. Seasonal effect such as January effect also became evidence against efficiency market hypothesis. Usually, January bring higher return for small and high book to market firm. By using book to market strategy, this paper examines Fama and French theory on capital market. It examines efficiency market hypothesis, Fama and French model, and January effect for Indonesian Capital Market. The result of this paper is not exactly the same as Fama and French. They found that stocks with high book to market have higher return than low book t o market. The stocks with high book to market have higher risk compare to stocks with low book to market. In Indonesia, however, the result is contrary to Fama and French theory. Indonesia produces higher return and risk in low book to market portfolio. However, the result shows that Indonesian Capital Market is inefficient because low book to market stocks can outperform market return. This paper also finds that Fama and French multifactor model are applicable for Indonesian Capital Market. It means that one risk factor did not enough to explain average return. This research shows that book to market became one of the factor to explain expected returns. This paper also found that the test for January effect shows a similar pattern with Fama and French, who state that high book to market firm tend to have higher return compare to low book to market in January. Therefore, in Indonesia show the similar tendency for January effect. However, January effect on Indonesia cannot explain multifactor model. The statistics results show while January only is tested, the result is not significant for all variables. Then, when exclude January is tested the result is significant and similar with full sample result. Therefore, it implies that book-to-market strategy is not seasonal phenomenon in Indonesia. In the end of this paper, the results encourage the investor to pick portfolio based on fundamental research and analysis in the expectation that a portfolio of selected stocks can consistently outperform the market. This result suggest that for the period of June 2003 until May 2007, low book to market stocks (growth stock) give higher return compare to high book to market. So, for long term period, it is better for Indonesian investor to hold growth stocks, which have low book to market ratio, and strong in fundamental. Keyword: Book-to-Market Strategy, Efficiency Market Hypothesis, CAPM i
Strategi Book to Market: Studi Penelitian di Bursa Efek Jakarta Widita Rarasati 19004115 Tanggal Ujian Akhir: 7 Agustus 2007 Tanggal Wisuda: 27 Oktober 2007 Program Sarjana Institut Teknologi Bandung, 2007 Pembimbing: Deddy P. Koesrindartoto Ph.D ABSTRAKSI Pasar Modal Indonesia telah berkembang dengan sangat cepat. Banyak teori yang berkembang di antara investor dan akademik. Pada tahun 1992, Fama and French menbuat penelitian yang berpengaruh terhadap teori pasar modal. Mereka mengubah pandangan para akademik tentang Capital Asset Pricing Model dan Effisiensi Pasar modal. Fama and French mengatakan bahwa risiko pasar (beta) tidak cukup menjelaskan keuntungan (expected return), ada bebaerapa factor selain market beta yang mempengaruhi keuntungan (expected return), seperti size dan ratio book to market. Mereka adalah sebagai alternative dari systematic risk. Fama and French mengatakan bahwa perusahaan kecil dan yang mempunyai book to market yang tinggi, memberikan keuntungan yang lebih tinggi dibandingkan perusahaan besar dan mempunya book to market yang rendah. Pernyataan ini juga menjadi bukti melawan pasar effisiensi. Efek musiman seperti bulan Januari juga menjadi bukti melawan pasar effisiensi. Perusahaan kecil dan yang mempunyai book to market tinggi, biasanya menghasilkan return yang lebih tinggi disbanding bulan-bulan lainnya. Dengan menggunakan metode book to market, riset ini mempelajari tentang teori Fama dan French. Riset ini untuk meneliti tentang Model Fama dan French (multifactor model), effisiensi pasar modal, dan effek Januari untuk pasar modal Indonesia. Hasil dari riset ini tidak 100% sama dengan hasil Fama dan French. Mereka menemukan bahwa saham/portofolio dengan book to market tinggi memberikan keuntungan dan resiko yang lebih besar dibandingkan saham/portofolio dengan book to market rendah. Akan tetapi, hasil di Indonesia merupakan kebalikan dari teori Fama dan French. Di Indonesia saham/portofolio yang memberikan keuntungan dan resiko yang lebih besar adalah saham dengan book to market yang rendah. Walaupun hasil yang didapatkan berbeda dengan teori Fama dan French, hasil ini tetap menunjukan bahwa pasar modal di Indonesia tidak effisien. Hal ini dikarenakan saham/portofolio dengan book to market rendah dapat melebihi keuntungan pasar. Riset ini juga menunjukan bahwa teori fama dan French berlaku di pasar modal Indonesia. Hal ini berarti satu factor resiko tidak cukup menjelasakan rata-rata keuntungan. Riset ini menujukan bahwa book to market menjadi salah satu faktor untuk menjelaskan keuntungan. Dalam test untuk efek January, riset ini juga menunjukan kecenderungan yang sama dengan Fama dan French. Saham dengan high book to market memiliki kecenderungan untuk menghasilkan keuntungan yang lebih dibandingkan bulan lainnya. Akan tetapi, efek January di Indonesia tidak dapat menjelaskan multifactor model. Hal ini berarti multifactor model dapat digunakan untuk bulan bulan yang lain. Hasil akhir dari paper ini menyarankan para investor untuk memilih saham/portofolio yang memiliki fundamental yang kuat dan diharapkan dapat memberikan keuntungan yang melebihi pasar. Kesimpulan dari riset ini, dalam periode Juni 2003 sampai Mei 2007, saham/portofolio dengan book to market yang rendah memberikan rata-rata keuntungan yang lebih tinggi dibandingan saham dengan book to market yang rendah. Kata Kunci: Book-to-Market Strategy, Efficiency Market Hypothesis, CAPM
VALIDATION PAGE BOOK TO MARKET STRATEGY REVISITED: EMPIRICAL STUDY ON JAKARTA STOCKS EXCHANGE By: WIDITA RARASATI ID No: 19004115 Undergraduate Program School of Business and Management Institut Teknologi Bandung Validated By Deddy P. Koesrindartoto Ph.D NIP: 999 059 102 iii
FOREWORD Assalamualaikum Wr. Wb. Alhamdulliah, first of all I would like to thank God, who never got his hand out of my-self. Because the God-will, I can finish this final project. The final project is a requirement for bachelor degree of business management at Institut Teknologi Bandung. The project theme is Book to Market Picking Strategy Revisited: Empirical Study at Jakarta Stocks Exchange. This project examines the Indonesia Capital Market whether it is efficient or not and the strategy to pick the portfolio. Furthermore, this project uses the Fama and French method, in order to examine the implementation of Fama and French theory in Indonesia. During the process, I would like to thank to some people and organization who give the important contribution for this final project. I owe special thank to: 1. Pak Deddy P. Koesrindartoto Ph.D as my supervisor, who helped me with his guidance, comment, and continuous encouragement. 2. The Center of Researched Indonesia Capital Market (perpustakaan BEJ), which helped me in providing my all empirical data. 3. The entire of SBM-ITB lecturer, who gave some knowledge during my study. 4. Maharani Putri as my partner, who supported and made this final project possible and provided me with useful insight into the projects. 5. My Best friends Amy, Gita, Ratih, Nusrat, and Septi, who gave me support. Especially Septi, thank you for correcting my grammar. 6. All My Friend in SBM-ITB 2007, who gives me insight about the meaning of happiness and friendships. Hope you all will be success in the future. 7. My Family who always support and encourage me during my study in SBM- ITB. 8. Then, the others who have been involved in this process and all have contributed in one way or the other to the final result of this project, which I cannot tell one by one. v
I realize that this final project is not perfect. There are some weaknesses in this project; therefore I hope there will be critique and suggestion for this final project. I hope this project will give some insight about Indonesia Capital Market Bandung, July 31, 2007 Widita Rarasati vi
LIST OF CONTENTS ABSTRACT..... i VALIDATION PAGE... iii FORWARD... v LIST OF CONTENTS... vii LIST OF FIGURE.. ix LIST OF TABLE... xi LIST OF EQUATIONS. xiii LIST OF APPENDIX xv CHAPTER 1 INTRODUCTION... 1 1.1 Background.. 1 1.2 Problem Formulations. 3 1.3 Objectives 3 1.4 Expected Contributions... 4 1.5 Problems Boundaries... 4 1.6 Outline.... 4 CHAPTER 2 THEORETICAL FOUNDATION... 7 2.1 Efficiency Market Hypothesis. 7 2.2 Evidence against Efficient Market Hypothesis... 8 2.3 Capital Assets Pricing Model.. 10 2.4 The Cross-Section of Expected Returns.. 11 2.5 January Effect.. 12 2.6 Statistical Theory. 14 2.6.1 Hypothesis Testing Methodology... 13 2.6.2 Independent Sample T-Test. 14 2.6.3 F-Test for Difference in Two Variance... 14 2.6.4 Multiple Linear Regression. 15 CHAPTER 3 METHODOLOGY.. 17 3.1 Methodology... 17 3.2 Hypotheses... 17 3.3 Theoretical Foundation... 18 3.4 Data Collection... 19 vii
3.5 Hypotheses Test... 19 3.6 Data Analysis... 20 3.7 Conclusions. 20 CHAPTER 4 DATA COLLECTION AND ANALYSIS.. 21 4.1 Data Collection... 21 4.2 Data Processing... 21 4.3 Hypothesis Test... 26 4.3.1 Hypothesis Test for Means.. 26 4.3.2 Hypothesis Test for Variance.. 27 4.4 Correlation between Returns, Market, and Book to Market... 28 4.5 Data Analysis... 29 4.5.1 Full Sample Report 29 4.5.2 January Effect Sample. 32 CHAPTER 5 CONCLUSIONS. 37 5.1 Conclusions. 37 5.2 Suggestions...... 38 REFERENCES... 41 viii
LIST OF FIGURE Figure 2.1 CAPM Model 10 Figure 3.1 Methodology... 17 Figure 4.1 Rejection Areas One-tail T-test for Lower-tail... 26 Figure 4.2 Rejection Areas for F-test Lower Critical Value.. 27 ix
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LIST OF TABLE Table 4.1 Average Return of High Book to Market Stocks. 22 Table 4.2 Average Return of Low Book to Market Stocks... 24 Table 4.3 Descriptive Statistics High and Low Book to Market Portfolio (Period: June 2003 May 2007).. 30 Table 4.4 Hypotheses Test for Means (Period: June 2003 May 2007)... 31 Table 4.5 Coefficients for Regression (Period: June 2003 May 2007)... 32 Table 4.6 Regression Model Summary Full Sample (Period: June 2003 May 2007)... 32 Table 4.7 Descriptive Statistics High and Low Book to Market Portfolio (January Only)... 33 Table 4.8 Hypotheses Test for Means (January Only) 33 Table 4.9 Coefficients for Regression (January Only) 34 Table 4.10 Regression Model Summary (January Only) 34 Table 4.11 Descriptive Statistics High and Low Book to Market Portfolio (Exclude January).. 35 Table 4.12 Hypotheses Test for Means (Exclude January)... 35 Table 4.13 Coefficients for Regression (Exclude January)... 36 Table 4.14 Regression Model Summary (Exclude January)... 36 Table 5.1 Hypotheses Test Means Summary... 38 Table 5.2 Hypotheses Test Variance Summary... 38 Table 5.3 Multifactor Model Summary... 38 xi
LIST OF EQUATIONS Eq. 2.5 T-Statistics Formula... 14 Eq. 2.4 Pooled Variance... 14 Eq. 2.6 Multiple Linear Regression 15 Eq. 3.1 Book to market Multifactor Model 18 Eq. 3.2 Hypotheses Test for Variance 19 Eq. 3.3 Hypotheses Test for Means 19 Eq. 4.1 Quartile (Upper)... 22 Eq. 4.2 Quartile (Middle) 22 Eq. 4.3 Quartile (Lower)... 22 Eq. 4.6 F-Lower Critical Value.. 27 Eq. 4.8 Test for Significant Multiple Linear Regression 28 Eq. 4.9 F-test for Multiple Linear Regression 28 Eq. 4.10 R square 29 Eq. 4.11 adjusted R square... 29 xiii
LIST OF APPENDIX Appendix A: List of Stock from High to Low Book to Market Ratio 45 Appendix B: Average Monthly Return 52 Appendix C: BI Rate... 54 Appendix D: Table T-distribution... 55 Appendix E: Table F-distribution... 57 Appendix F: Interpolation... 58 xv