The Economics of Value Investing

66 Pages Posted: 10 Jul 2017 Last revised: 21 May 2023

See all articles by Kewei Hou

Kewei Hou

Ohio State University (OSU) - Department of Finance

Haitao Mo

University of Kansas

Chen Xue

University of Cincinnati

Lu Zhang

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

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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

Hou, Kewei and Mo, Haitao and Xue, Chen and Zhang, Lu, The Economics of Value Investing (June 2017). NBER Working Paper No. w23563, Available at SSRN: https://ssrn.com/abstract=2999542

Kewei Hou (Contact Author)

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

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Haitao Mo

University of Kansas

Lawrence, KS 66045
United States

Chen Xue

University of Cincinnati ( email )

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

Lu Zhang

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)

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Cambridge, MA 02138
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