The Economics of Value Investing

Kewei Hou, Haitao Mo, Chen Xue and Lu Zhang ()
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Kewei Hou: Ohio State University
Haitao Mo: Louisiana State University
Chen Xue: University of Cincinnati

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: The investment CAPM provides an economic foundation for Graham and Dodd's (1934) Security Analysis, without mispricing. Expected returns vary cross-sectionally, depending on firms' investment, expected profitability, and expected investment growth. Our economic model also offers an appealing alternative to two workhorse accounting models. Empirically, many anomaly variables are associated with future investment growth, in the same direction with future returns. An expected growth factor earns on average 0.56% per month (t = 6.66), and adding it to the q-factor model improves the model*s performance substantially. In all, value investing is consistent with efficient markets.

JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2017-06
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Citations: View citations in EconPapers (1)

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Working Paper: The Economics of Value Investing (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2017-16

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