The Economics of Value Investing
Charles A. Dice Center Working Paper No. 2017-16
69 Pages Posted: 5 Jul 2017 Last revised: 4 Dec 2017
Date Written: June 30, 2017
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.
Keywords: Value Investing, Security Analysis, The Investment CAPM, Efficient Markets
JEL Classification: G12, G14
Suggested Citation: Suggested Citation