3. Data selection and issues

#### 3.1. The sample

The data sample used in the analysis consists of monthly price, total return and accounting data downloaded from 'Finnet Data Yayıncılık'. The data set contains nonfinancial 263 firms listed in BIST (Borsa Istanbul or Istanbul stock exchange) for the period between 31.12.1999 and 30.05.2017. The collected accounting data includes total assets, total liabilities, outstanding shares, owner's equity and operating income, where operating income is defined as 'net sales minus operating expenses' and operating expenses is defined as the 'sum of all expenses related to operations'. Data was collected for all available active and dead stocks in Istanbul stock exchange totalling 204 observations. The data was quoted in the Turkish Lira (TRY hereafter).

The downloaded sample included a large amount of stocks, which were already dead at the beginning of the research period, as well as some missing data types and data errors, which ought to be removed.

#### 3.2. Variable definitions

This subsection defines the variables needed in the factor creation process. Market capitalisation or market cap was used as a measure of size for each stock and was calculated by multiplying the price (P) at the 31st of December each year with outstanding shares at the 31st of December for the same year. The price data was obtained from FDY. Book equity was calculated as yearly total assets minus total liabilities from FDY. Book-to-market ratio (B/M) was calculated from the previous two variables by dividing book equity by market cap. Operating profitability (OP) was calculated by dividing operating income by book equity following [22]. Finally, investment (Inv) was calculated as in Eq. (4):

$$\frac{\text{Total Assets}\_{t-1} - \text{Total Assets}\_{t-2}}{\text{Total Assets}\_{t-2}} \tag{4}$$

TRY 3-month Libor rate is used as a proxy of risk-free rate (Rf), while market return (Rm) is approximated by natural log difference of BIST-100 Index of the Istanbul stock exchange. It consists of 100 stocks, which are selected among the stocks of companies listed on the national market (excluding list C companies). Monthly returns for stocks are all calculated as natural log difference of monthly stock data.

#### 3.3. The return period

Fama and French use 6-month gap between the ends of the fiscal year and the portfolio formation date can be considered as convenient and conservative. Since all the accounting data in BIST is available by the end of May of each year, I use 5-month gap. Hence, to ensure that all accounting variables are known by investors, I assume that all accounting information is made public by the end of May, and I use monthly returns from the beginning of June to the end of the following year in May. And, each year at the end of May, I sort the portfolios.

Fama and French [15, 16] used value-weighted returns in their study; however, they also stressed that equal-weighted returns do a better job than value-weighted returns in explaining returns by 3F-FF model. Lakonishok et al. [23] also suggest to use equal-weighted portfolios to investigate the relationship between risk factors and stock returns. Hence, the equal-weighted monthly returns on each portfolio were used in this study.

#### 3.4. Filtering data

3. Data selection and issues

72 Financial Management from an Emerging Market Perspective

The data sample used in the analysis consists of monthly price, total return and accounting data downloaded from 'Finnet Data Yayıncılık'. The data set contains nonfinancial 263 firms listed in BIST (Borsa Istanbul or Istanbul stock exchange) for the period between 31.12.1999 and 30.05.2017. The collected accounting data includes total assets, total liabilities, outstanding shares, owner's equity and operating income, where operating income is defined as 'net sales minus operating expenses' and operating expenses is defined as the 'sum of all expenses related to operations'. Data was collected for all available active and dead stocks in Istanbul stock exchange totalling 204 observations. The data was quoted in the Turkish Lira (TRY

The downloaded sample included a large amount of stocks, which were already dead at the beginning of the research period, as well as some missing data types and data errors, which

This subsection defines the variables needed in the factor creation process. Market capitalisation or market cap was used as a measure of size for each stock and was calculated by multiplying the price (P) at the 31st of December each year with outstanding shares at the 31st of December for the same year. The price data was obtained from FDY. Book equity was calculated as yearly total assets minus total liabilities from FDY. Book-to-market ratio (B/M) was calculated from the previous two variables by dividing book equity by market cap. Operating profitability (OP) was calculated by dividing operating income by book equity

> Total Assetst<sup>1</sup> Total Assetst<sup>2</sup> Total Assetst<sup>2</sup>

TRY 3-month Libor rate is used as a proxy of risk-free rate (Rf), while market return (Rm) is approximated by natural log difference of BIST-100 Index of the Istanbul stock exchange. It consists of 100 stocks, which are selected among the stocks of companies listed on the national market (excluding list C companies). Monthly returns for stocks are all calculated as natural

Fama and French use 6-month gap between the ends of the fiscal year and the portfolio formation date can be considered as convenient and conservative. Since all the accounting data in BIST is available by the end of May of each year, I use 5-month gap. Hence, to ensure that all accounting variables are known by investors, I assume that all accounting information is made public by the end of May, and I use monthly returns from the beginning of June to the end of

the following year in May. And, each year at the end of May, I sort the portfolios.

(4)

following [22]. Finally, investment (Inv) was calculated as in Eq. (4):

3.1. The sample

hereafter).

ought to be removed.

3.2. Variable definitions

log difference of monthly stock data.

3.3. The return period

At the end of each year, I eliminated firms that have the following specifics: (1) negative bookto-market values were removed, and (2) the companies with yearly increase in their investment, as defined in Eq. (4), which is either less than �50% or higher than 100% in a certain year were eliminated. This would imply that the company in question lost half of its assets, or more than doubled its assets in the given year, which seems very unlikely during normal recurring circumstances.
