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An Analysis of Contrarian Investment Strategies in the UK


  • Alan Gregory

    (University of Exeter)

  • Richard D.F. Harris

    (University of Exeter)

  • Maria Michou

    (University of Exeter)


The performance of contrarian, or value strategies - those that invest in stocks that have low market value relative to a measure of their fundamentals - continues to attract attention from researchers and practitioners alike. While there is much extant evidence on the profitability of value strategies, however, most of this evidence pertains to the US. In this paper, we provide a detailed characterisation of value strategies using data on UK stocks for the period 1975 to 1998. We first undertake simple one-way and two-way classifications of stocks in which value is defined using both past performance and expected future performance. Using sales growth as a proxy for past performance and book-to-market, earnings yield and cash flow yield as measures of expected future performance, we find that that stocks that have both poor past performance and low expected future performance have significantly higher returns than those that have either good past performance or good expected future performance. Allowing for size effects in returns reduces the value premium but it nevertheless remains significant. We go on to explore whether the profitability of value strategies in the UK can be explained using the three factor model of Fama and French (1996). Broadly consistent with the results for the US, we find that using the one-way classification the excess returns to almost all value strategies can be explained by their loading on the market, book-to-market and size factors. However, in contrast with the US, using the two-way classification there are excess returns to value strategies based on book-to-market and sales growth, even after controlling for their loading on the market, book-to-market and size factors. Copyright Blackwell Publishers Ltd 2001.

Suggested Citation

  • Alan Gregory & Richard D.F. Harris & Maria Michou, 2001. "An Analysis of Contrarian Investment Strategies in the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(9&10), pages 1192-1228.
  • Handle: RePEc:bla:jbfnac:v:28:y:2001-11:i:9&10:p:1192-1228

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    Cited by:

    1. Patricia Chelley-steeley & Antonios Siganos, 2004. "Momentum profits and macroeconomic factors," Applied Economics Letters, Taylor & Francis Journals, vol. 11(7), pages 433-436.
    2. Ye, Qing & Turner, John D., 2014. "The cross-section of stock returns in an early stock market," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 114-123.
    3. Nawar Hashem & Larry Su, 2015. "Industry Concentration and the Cross-Section of Stock Returns: Evidence from the UK," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 16(4), pages 769-785, August.
    4. Mattias Hamberg & Jiri Novak, 2010. "Accounting Conservatism and Transitory Earnings in Value and Growth Strategies," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(5‐6), pages 518-537, June.
    5. Alan Gregory & Maria Michou, 2009. "Industry Cost of Equity Capital: UK Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5-6), pages 679-704.
    6. Edward Lee & Weimin Liu & Norman Strong, 2007. "UK Evidence on the Characteristics versus Covariance Debate," European Financial Management, European Financial Management Association, vol. 13(4), pages 742-756, September.
    7. Keith Anderson & Chris Brooks, 2006. "The Long-Term Price-Earnings Ratio," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(7-8), pages 1063-1086.
    8. Walid Saleh, 2014. "Explaining the Cross-Sectional Patterns of UK Expected Stock Returns: The Effect of Intangibles," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 5(2), pages 160-170, April.
    9. Alan Gregory, 2005. "The Long Run Abnormal Performance of UK Acquirers and the Free Cash Flow Hypothesis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(5-6), pages 777-814.
    10. repec:asi:aeafrj:2018:p:449-465 is not listed on IDEAS
    11. Xiafei Li & Chris Brooks & Joëlle Miffre, 2009. "The Value Premium and Time-Varying Volatility," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(9-10), pages 1252-1272.
    12. Edward Lee & Stephen Lin, 2008. "Corporate Sell‐offs in the UK: Use of Proceeds, Financial Distress and Long‐run Impact on Shareholder Wealth," European Financial Management, European Financial Management Association, vol. 14(2), pages 222-242, March.
    13. repec:bla:eufman:v:19:y:2013:i:4:p:747-774 is not listed on IDEAS
    14. Keith Anderson & Chris Brooks, 2005. "The Long-Term P/E Radio," ICMA Centre Discussion Papers in Finance icma-dp2005-02, Henley Business School, Reading University.
    15. Maria Michou, 2009. "Is the Value Spread a Good Predictor of Stock Returns? UK Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(7-8), pages 925-950.
    16. Leone, Vitor & de Medeiros, Otavio Ribeiro, 2015. "Signalling the Dotcom bubble: A multiple changes in persistence approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 55(C), pages 77-86.
    17. Keith Lam & Frank Li, 2008. "The risk premiums of the four-factor asset pricing model in the Hong Kong stock market," Applied Financial Economics, Taylor & Francis Journals, vol. 18(20), pages 1667-1680.
    18. Alan Gregory & Cherif Guermat & Fawaz Al-Shawawreh, 2010. "UK IPOs: Long Run Returns, Behavioural Timing and Pseudo Timing," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(5-6), pages 612-647.
    19. Gregory, Alan & McCorriston, Steve, 2005. "Foreign acquisitions by UK limited companies: short- and long-run performance," Journal of Empirical Finance, Elsevier, vol. 12(1), pages 99-125, January.
    20. Chau Duong & Gioia Pescetto & Daniel Santamaria, 2014. "How value-glamour investors use financial information: UK evidence of investors' confirmation bias," The European Journal of Finance, Taylor & Francis Journals, vol. 20(6), pages 524-549, June.
    21. repec:bla:jecsur:v:31:y:2017:i:1:p:79-168 is not listed on IDEAS
    22. Elisabeth Dedman & Sulaiman Mouselli & Yun Shen & Andrew W. Stark, 2009. "Accounting, Intangible Assets, Stock Market Activity, and Measurement and Disclosure Policy—Views From the U.K," Abacus, Accounting Foundation, University of Sydney, vol. 45(3), pages 312-341, September.
    23. repec:scn:00rbes:y:2015:i:4:p:22-43 is not listed on IDEAS
    24. repec:bla:eufman:v:16:y:2010:i:2:p:229-255 is not listed on IDEAS

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