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The Economics of Value Investing

Author

Listed:
  • Hou, Kewei

    (Ohio State University)

  • Mo, Haitao

    (Louisiana State University)

  • Xue, Chen

    (University of Cincinnati)

  • Zhang, Lu

    (Ohio State University)

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.

Suggested Citation

  • Hou, Kewei & Mo, Haitao & Xue, Chen & Zhang, Lu, 2017. "The Economics of Value Investing," Working Paper Series 2017-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2017-16
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    Cited by:

    1. Barras, Laurent, 2019. "A large-scale approach for evaluating asset pricing models," Journal of Financial Economics, Elsevier, vol. 134(3), pages 549-569.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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