The Economics of Value Investing

Kewei Hou, Haitao Mo, Chen Xue and Lu Zhang ()

No 23563, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The investment CAPM provides an economic foundation for Graham and Dodd’s (1934) Security Analysis. Expected returns vary cross-sectionally, depending on firms’ investment, profitability, and expected investment growth. Empirically, many anomaly variables predict future changes in investment-to-assets, in the same direction in which these variables predict future returns. However, the expected investment growth effect in sorts is weak. The investment CAPM has different theoretical properties from Miller and Modigliani’s (1961) valuation model and Penman, Reggiani, Richardson, and Tuna’s (2017) characteristic model. In all, value investing is consistent with efficient markets.

JEL-codes: G12 G14 G31 (search for similar items in EconPapers)
Date: 2017-06
New Economics Papers: this item is included in nep-cfn
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