Value investing: integrating theory and practice

Charles M.C. Lee

Chapter 18 in Handbook on the Financial Reporting Environment, 2025, pp 347-374 from Edward Elgar Publishing

Abstract: Value investing refers to the buying or selling of stocks based on a perceived gap between their current market price and their long-run fundamental value. One of the most remarkable regularities in the asset pricing literature is the fact that value investing has consistently generated positive risk-adjusted returns over many decades. In this article, I revisit the theoretical underpinnings of value investing and show, using an accounting-based valuation model, that what we have learned about value investing from recent academic studies in fact dovetails nicely with the strategies being used by such legendary investors as Benjamin Graham, Warren Buffett, and Joel Greenblatt. In fact, an accounting-based valuation framework accommodates virtually all the return prediction patterns documented by academic researchers from accounting and finance.

Keywords: Equity valuation; Financial statement analysis; Fundamental analysis; Return predictability; Asset pricing; Behavioral finance; Market efficiency (search for similar items in EconPapers)
Date: 2025
ISBN: 9781800888678
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