The Economics of Value Investing

Charles A. Dice Center Working Paper No. 2017-16

Fisher College of Business Working Paper No. 2017-03-016

69 Pages Posted: 5 Jul 2017 Last revised: 4 Dec 2017

See all articles by Kewei Hou

Kewei Hou

Ohio State University (OSU) - Department of Finance

Haitao Mo

E. J. Ourso College of Business, Louisiana State University

Chen Xue

University of Cincinnati

Lu Zhang, 张橹

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 30, 2017

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.

Keywords: Value Investing, Security Analysis, The Investment CAPM, Efficient Markets

JEL Classification: G12, G14

Suggested Citation

Hou, Kewei and Mo, Haitao and Xue, Chen and Zhang, Lu, The Economics of Value Investing (June 30, 2017). Charles A. Dice Center Working Paper No. 2017-16; Fisher College of Business Working Paper No. 2017-03-016. Available at SSRN: https://ssrn.com/abstract=2995664 or http://dx.doi.org/10.2139/ssrn.2995664

Kewei Hou

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-0552 (Phone)
614-292-2418 (Fax)

Haitao Mo

E. J. Ourso College of Business, Louisiana State University ( email )

E. J. Ourso College of Business
Louisiana State University
Baton Rouge, LA 70803
United States

Chen Xue

University of Cincinnati ( email )

College of Business Administration
Cincinnati, OH 45221
United States
(513) 556-7078 (Phone)

Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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