Contrarian Investment Strategies in a European Context

In 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, schleifer and Vishny (1994) for Japan and the United States respectively.