Value vs. growth : evidence from the German stock market

This thesis examines if a rational-minded security analysis based on historical data and with a focus on firms with low price-to-earnings, price-to-book and price-to-cash-flow ratios helps an investor to maximize returns. The underlying idea that firms with low multipliers - commonly known as value stocks - outperform firms with high multipliers known as growth stocks - has found wide acceptance and refers to a concept called value investing. Previous research provides evidence that in many international markets firms with low valuations and the above-mentioned ratios tend to outperform firms with high valuations. There is, however, a gap in the literature as only a few studies examine this effect for the German stock market. This study covers the period from 2005 to 2014 and includes all German stocks listed in the DAX, MDAX, and SDAX index. In the course of this paper, value and growth portfolios are constructed to examine differences in portfolio return. The results show a value premium in the German stock market. This paper finds that value stocks outperform growth stocks on the basis of the price-to-cash-flow ratio. Furthermore, I find statistical evidence that the price-to-earnings and price-to-cash-flow ratios offer higher value premiums than the price-to-book ratio.