Using Book-to-Market Ratio, Accounting Strength, and Momentum to Construct a Value Investing Strategy: The Case of Spain

REFC – Spanish Journal of Finance and Accounting, Forthcoming

49 Pages Posted: 25 May 2018

See all articles by Carlos Forner

Carlos Forner

Universidad de Alicante-Dpto. Economía Financiera

Pablo J. Vazquez Veira

University of Alicante - Finance & Accounting

Date Written: March 23, 2018

Abstract

The weak value-growth premium of the Spanish stock market highlights the importance of enhancing the accounting-based fundamental strength of the value-growth strategy. This accounting strength is needed to detect potential errors in market expectations that result in mispriced stocks. When we select value-growth stocks whose accounting strength is incongruent with the market expectation reflected by their book-to-market ratio, the value-growth strategy becomes highly profitable. Our results are consistent with the evidence gleaned by Piotroski and So (2012) in the US market and demonstrate that stock markets with a weak value-growth premium are not necessarily free of errors in market expectations. We also demonstrate that the momentum effect allows better timing of this strategy, indicating the best time to buy and sell mispriced stocks. This effect increases profits and reduces the time needed to hold stocks to achieve these profits. Moreover, characteristics of the Spanish fiscal year-end distribution are ideal for avoiding the problems that Kim and Lee (2014) encountered.

Keywords: value-growth stocks, mispricing, rational pricing, momentum, accounting strength, expectational errors, accounting-based fundamental strength

JEL Classification: G14, G11, M41

Suggested Citation

Forner Rodríguez, Carlos and Vazquez, Pablo J., Using Book-to-Market Ratio, Accounting Strength, and Momentum to Construct a Value Investing Strategy: The Case of Spain (March 23, 2018). REFC – Spanish Journal of Finance and Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3178008

Carlos Forner Rodríguez (Contact Author)

Universidad de Alicante-Dpto. Economía Financiera ( email )

Ctra. S. Vicente s/n
03690-S. Vicente del Raspeig
Alicante, San Vicente del Raspeig - Alicante 03690
Spain

Pablo J. Vazquez

University of Alicante - Finance & Accounting ( email )

Ctra. S. Vicente s/n
03690-S. Vicente del Raspeig
Alicante, San Vicente del Raspeig - Alicante 03690
Spain

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