The Importance of Accounting Information in Portfolio Optimization

Journal of Accounting, Auditing & Finance, January 2011, Vol. 26, Issue 1, p. 1

31 Pages Posted: 18 Jan 2013

See all articles by John R. M. Hand

John R. M. Hand

University of North Carolina Kenan-Flagler Business School

Jeremiah Green

Texas A&M University - Department of Accounting

Date Written: September 7, 2009

Abstract

We study the economic importance of accounting information as defined by the value that a sophisticated investor can extract from publicly available financial statements when optimizing a portfolio of U.S. equities. Our approach applies the elegant new parametric portfolio policy method of Brandt, Santa-Clara, and Valkanov (2009) to three simple and firm-specific annual accounting characteristics-accruals, change in earnings, and asset growth. We find that the set of optimal portfolio weights generated by accounting characteristics yield an out-of-sample, pre-transactions-costs annual information ratio of 1.9 as compared to 1.5 for the standard price-based characteristics of firm size, book-to-market, and momentum. We also find that the delevered hedge portion of the accounting-based optimal portfolio was especially valuable during the severe bear market of 2008 because unlike many hedge funds it delivered a hedged return in 2008 of 12 percent versus only 3 percent for price-based strategies and -38 percent for the value-weighted market.

Suggested Citation

Hand, John R. M. and Green, Jeremiah, The Importance of Accounting Information in Portfolio Optimization (September 7, 2009). Journal of Accounting, Auditing & Finance, January 2011, Vol. 26, Issue 1, p. 1. Available at SSRN: https://ssrn.com/abstract=2202328

John R. M. Hand (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3173 (Phone)
919-962-4727 (Fax)

Jeremiah Green

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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