The Economics of Value Investing
66 Pages Posted: 10 Jul 2017 Last revised: 21 May 2023
There are 2 versions of this paper
The Economics of Value Investing
Date Written: June 2017
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.
Suggested Citation: Suggested Citation