Fundamental Bibliography

Bibliography –  Fundamental

Abarbanell, J., and Bushee, B. (1997). Fundamental analysis, future earnings, and stock prices. Journal of Accounting Research 35(1): 1-24.

Abstract:
This paper examines empirical relations between rules of fundamental analysis and actual future earnings changes, analysts’ earnings forecast revisions, and contemporaneous stock returns. Our results indicate that many of the fundamental signals are related to future earnings and forecast revisions in the same way they are related to returns, however some significant exceptions are noted. Conditioning the relations on variables reflecting the macroeconomic, firm-specific and industry-specific contexts in which firms operate provides some further refinement to our understanding of the information contained in the fundamental signals. Additional tests suggest analysts’ forecast revisions display generalized underreaction to the future earnings information contained in some of the fundamental signals.

http://acct3.wharton.upenn.edu/faculty/bushee/ab97.pdf

Abarbanell, J., and Bushee, B. (1998). Abnormal returns to a fundamental analysis strategy. Accounting Review 73(1): 19-45.

Abstract:
We examine whether the application of fundamental analysis can yield significant abnormal returns. Using a collection of signals that reflect traditional rules of fundamental analysis related to contemporaneous changes in inventories, accounts receivables, gross margins, selling expenses, capital expenditures, effective tax rates, inventory methods, audit qualifications, and labor force sales productivity, we form portfolios that earn an average 12- month cumulative size-adjusted abnormal return of 13.2 percent. We find evidence that the fundamental signals provide information about future returns that is associated with future earnings news. Moreover, a significant portion of the abnormal returns is generated around subsequent earnings announcements. These findings are consistent with the underlying focus of fundamental analysis on the prediction of earnings. Significant abnormal returns to the fundamental strategy are not earned after the end of one year of return cumulation, indicating little support for the idea that the signals capture information about multiple-year-ahead earnings not immediately impounded in price or about long-term shifts in firm risk. Additional analysis on a holdout sample suggests that the strategy continues to generate abnormal returns in a period subsequent to the introduction of the fundamental signals in the literature, and contextual analyses indicate that the strategy performs better for certain types of firms (e.g., firms with prior bad news).

http://faculty.haas.berkeley.edu/kli/papers/Abarbanell&Bushee-1998TAR.pdf

Altman, E. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance 23(4): 589-609

NO ABSTRACT AVAILABLE

http://140.114.135.82/~jtyang/Teaching/Corporate_Governance/Papers/Altman%201968.pdf

Anderson, C., and L. Garcia-Feijoo, 2006, Empirical evidence on capital investment, growth options, and security returns, Journal of Finance 61, 171-194

Abstract:
Growth in capital expenditures conditions subsequent classification of firms to portfolios based on size and book-to-market ratios, as in the widely used Fama and French (1992, 1993) methods. Growth in capital expenditures also explains returns to portfolios and the cross section of future stock returns. These findings are consistent with recent theoretical models (e.g., Berk, Green, and Naik (1999)) in which the exercise of investment-growth options results in changes in both valuation and expected stock returns.

http://faculty.haas.berkeley.edu/kli/papers/Anderson&Garcia-Feijoo-2006JF.pdf

Baginski, S., and J. Wahlen, 2003. Residual income risk, intrinsic values, and share prices. The Accounting Review 78.

Abstract:
Empirical accounting research provides surprisingly little evidence on whether accounting earnings numbers capture cross-sectional differences in risk that are associated with cross-sectional differences in share prices. We address two questions regarding the risk-relevance of accounting numbers: (1) Are accounting-related risk measures (i.e., the systematic risk and total volatility in a firm’s time-series of residual return on equity) associated with the market’s assessment and pricing of equity risk? and (2) If so, are these accounting-related risk measures incrementally associated with the market’s assessment and pricing of equity risk beyond other observable factors, such as those in the Fama-French (1992) three-factor model?  We develop an accounting fundamentals-based measure of the market’s pricing of risk – the difference between actual share price and a residual income valuation model estimate of share value using risk-free rates of return. Our results show that both systematic risk and total volatility in residual return on equity partially explain this pricing differential, and that the explanatory power of total volatility is incremental to the Fama-French factors – market beta, firm size, and the market-to-book ratio.

http://faculty.haas.berkeley.edu/kli/papers/Baginski&Wahlen-2003TAR.pdf

Bernard, V., and Thomas, J. (1989). Post-earnings announcement drift: Delayed price response or risk premium? Journal of Accounting Research, 27 (Supplement), 1-36.

ABSTRACT NOT AVAILABLE

http://www.som.yale.edu/Faculty/jkt7/papers/bt1.pdf

Brown, D., and Rowe, B. (2007). The productivity premium in equity returns. SSRN eLibrary.

Abstract:
A productive firm has a high return on invested capital, and is likely to have a low capital to enterprise value ratio and a low book to market ratio. Similarly, unproductive firms tend to be value firms. This is evidence of an efficient market. However, given the well-known value premium in equity returns and given the negative correlation between book-to-market ratios and productivity in the cross section of firms, we expect productive firms to offer lower returns than unproductive firms. Therefore it is surprising that productivity is a positive predictor of returns. We conclude that investors have historically made systematic mistakes by failing to fully incorporate measures of firm productivity in stock selection. These errors are one source of the value premium in equity returns. If they continue, portfolio managers of all styles – value, growth and balanced – may increase alpha by tilting toward productive firms.

ARTICLE NOT AVAILABLE ON LINE

Campbell, J., Hilscher, J., and Szilagyi, J. (2008). In search of distress risk. The Journal of Finance 63(6): 2899-2939.

Abstract:
This paper explores the determinants of corporate failure and the pricing of financially distressed stocks using US data over the period 1963 to 2003. Firms with higher leverage, lower profitability, lower market capitalization, lower past stock returns, more volatile past stock returns, lower cash holdings, higher market-book ratios, and lower prices per share are more likely to file for bankruptcy, be delisted, or receive a D rating. When predicting failure at longer horizons, the most persistent firm characteristics, market capitalization, the market-book ratio, and equity volatility become relatively more significant. Our model captures much of the time variation in the aggregate failure rate. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small-cap risk factors than stocks with a low risk of failure. These patterns hold in all size quintiles but are particularly strong in smaller stocks. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress.

http://www.nyu.edu/econ/user/galed/fewpapers/FEW%20S07/Campbell-Hilscher-Szilagyi.pdf

Cao Q, Parry M. Neural network earnings per share forecasting models: A comparison of backward propagation and the genetic algorithm. Decision Support Systems [serial online]. April 2009;47(1):32-41.

http://www.investmentanomalies.com/articles/052.pdf

Cao, Y., L. A. Myers, and T. Sougiannis. (2006). The Information Content of Earnings Acceleration. Ying Cao Texas A & M University. Linda A. Myers Texas A & M University Theodore Sougiannis University of Illinois and ALBA September 2006

Abstract:
We examine whether the change in earnings growth rates (earnings acceleration) conveys information to stock market participants. Results from cross-sectional short- and long-window returns-earnings regressions reveal a strong association between contemporaneous returns and earnings acceleration after controlling for earnings levels and changes. We also find that investors view earnings acceleration to be informative when its sign conforms to the sign of earnings growth, and we document that the information content of earnings acceleration appears to derive from its ability to predict earnings. Furthermore, we find that financial analysts appear to use the information in earnings acceleration in predicting future earnings, but our empirical evidence suggests that they do not use it efficiently. This study contributes to the returns earnings literature by showing that more useful information can be extracted from reported earnings numbers than has been previously documented, and suggests that future research should include earnings acceleration in returns-earnings regressions.

http://zicklin.baruch.cuny.edu/faculty/accountancy/events/downloads/earnings_acceleration-091506.pdf

Chava, S., and Jarrow, R. A. (2004). Bankruptcy prediction with industry effects. Review of Finance 8: 537-569

Abstract:
This paper investigates the forecasting accuracy of bankruptcy hazard rate models for U.S. companies over the time period 1962 – 1999 using both yearly and monthly observation intervals. The contribution of this paper is multiple-fold. One, using an expanded bankruptcy database we validate the superior forecasting performance of Shumway’s (2001) model as opposed to Altman (1968) and Zmijewski (1984). Two, we demonstrate the importance of including industry effects in hazard rate estimation. Industry groupings are shown to significantly affect both the intercept and slope coefficients in the forecasting equations. Three, we extend the hazard rate model to apply to financial firms and monthly observation intervals. Due to data limitations, most of the existing literature employs only yearly observations. We show that bankruptcy prediction is markedly improved using monthly observation intervals. Fourth, consistent with the notion of market efficiency with respect to publicly available information, we demonstrate that accounting variables add little predictive power when market variables are already included in the bankruptcy model.

http://www.nyu.edu/econ/user/galed/fewpapers/FEW%20S07/Campbell-Hilscher-Szilagyi.pdf

Chen, F., Jorgensen, B. and Y. Yong Keun, 2004. Implied cost of equity capital in earnings-based valuation: International evidence. Accounting and Business Research 34, 323-344.

Abstract:
Assuming the clean surplus relation, the Edwards-Bell-Ohlson residual income valuation (RIV) model expresses market value of equity as the sum of the book value of equity and the expected discounted future residual incomes. Without assuming the clean surplus relation, Ohlson and Juettner-Nauroth (2000) articulate the role of forward earnings per share in valuation. We compare the implied costs of equity capital from these two approaches to earnings-based valuation within seven developed countries. We hypothesize superior performance from the RIV model in countries where the clean surplus relation holds well. First, we provide preliminary international evidence on the frequency and magnitude of the clean surplus deviations. Consistent with our hypothesis, we document superior reliability of the implied cost of equity capital derived from the RIV model when clean surplus adequately describes the firms’ financial reporting. That is, the implied cost of equity capital derived from Ohlson and Juettner-Nauroth (2000) is relatively more reliable in countries where the clean surplus deviations are common. Our analyses suggest that the proper choice of earnings-based valuation model may depend on analysts’ interpretation of their financial reporting environment.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=565784

Chen and Zhang (2009)- Investments /Assets predicts future returns

Abstract:
The market factor, an investment factor, and a return-on-assets factor combine to summarize the cross-sectional variation of expected stock returns. The new three-factor model substantially outperforms traditional asset pricing models in explaining anomalies associated with short-term prior returns, financial distress, net stock issues, asset growth, earnings surprises, and valuation ratios. The model’s performance, combined with its economic intuition based on q-theory, suggests that it can be used to obtain expected return estimates in practice.

www.cepr.org/meets/wkcn/5/5567/papers/ZhangFinal.pdf

Cooper, M., Gulen, H., & Schill, M. (2008). Asset Growth and the Cross‐Section of Stock Returns. The Journal of Finance , 63 (4), 1609-1651.

Abstract:
We test for firm-level asset investment effects in returns by examining the cross sectional relation between firm asset growth and subsequent stock returns. Asset growth rates are strong predictors of future abnormal returns. Asset growth retains its forecasting ability even on large capitalization stocks. When we compare asset growth rates with the previously documented determinants of the cross-section of returns (i.e., book-to-market ratios, firm capitalization, lagged returns, accruals, and other growth measures), we find that a firm’s annual asset growth rate emerges as an economically and statistically significant predictor of the cross-section of U.S. stock returns.

www.krannert.purdue.edu/faculty/hgulen/asset_growth.pdf

Courteau, L., J. Kao, and G. Richardson, 2001. Equity valuation employing the ideal versus ad hoc terminal value expressions. Contemporary Accounting Research.

Abstract:

Recently, Penman and Sougiannis (1998) and Francis, Olsson, and Oswald (2000) compared the bias and accuracy of the discounted cash flow model (DCF) and Edwards-Bell-Ohlson residual income model (RIM) in explaining the relation between value estimates and observed stock prices. Both studies report that, with non-price-based terminal values, RIM outperforms DCF.  Our first research objective is to explore the question whether, over a five-year valuation horizon, DCF and RIM are empirically equivalent when Penman’s (1997) theoretically “ideal” terminal value expressions are employed in each model. Using Value Line terminal stock price forecasts at the horizon to proxy for such values, we find empirical support for the prediction of equivalence between these valuation models. Thus, the apparent superiority of RIM does not hold in a level playing field comparison.  Our second research objective is to demonstrate that, within each class of the DCF and RIM valuation models, the model that employs Value Line forecasted price in the terminal value expression generates the lowest prediction errors, compared with models that employ non-price-based terminal values under arbitrary growth assumptions. The results indicate that, for both DCF and RIM, price-based valuation models outperform the corresponding non�price-based models by a wide margin. These results imply that researchers should exercise care in interpreting findings from models using ad hoc terminal value expressions.

http://faculty.haas.berkeley.edu/kli/papers/Courteau_et_al-2001CAR.pdf

Damodaran, A., 2005. Valuation approaches and metrics: A survey of the theory and evidence. Foundations and Trends in Finance Volume. 1 (8), 693-784.

Abstract:
Valuation lies at the heart of much of what we do in finance, whether it is the study of market efficiency and questions about corporate governance or the comparison of different investment decision rules in capital budgeting. In this paper, we consider the theory and evidence on valuation approaches. We begin by surveying the literature on discounted cash flow valuation models, ranging from the first mentions of the dividend discount model to value stocks to the use of excess return models in more recent years. In the second part of the paper, we examine relative valuation models and, in particular, the use of multiples and comparables in valuation and evaluate whether relative valuation models yield more or less precise estimates of value than discounted cash flow models. In the final part of the paper, we set the stage for further research in valuation by noting the estimation challenges we face as companies globalize and become exposed to risk in multiple countries.

www.stern.nyu.edu/~adamodar/pdfiles/papers/valuesurvey.pdf

Dechow, P., and Sloan, R. (1997). Returns to contrarian investment strategies: Tests of naive expectations hypotheses. Journal of Financial Economics 43: 3-27.

Abstract:
This paper examines the ability of hypotheses based on naive investor expectations to explain the higher returns to contrarian investment strategies. Inconsistent with Lakonishok, Shleifer and Vishny (1995), we find no systematic evidence that stock prices naively reflect extrapolation of past trends in earnings and sales growth. Consistent with Bauman and Dowen (1988) and La Porta (1994), we find that stock prices appear to naively reflect analysts’ biased forecasts of future earnings growth. Further, we show that naive reliance on analysts’ forecasts of future earnings growth can explain over half the higher returns to contrarian investment strategies.

ARTICLE NOT AVAILABLE

Dichev, I. (1998). Is the risk of bankruptcy a systematic risk? The Journal of Finance 53(3): 1131-1147.

NO ABSTRACT AVAILABLE

http://azyz1.tripod.com/00_project/article/dichev1998.pdf

Easton, P.,M. McAnally, P. Fairfield, and X. Zhang. 2009. Financial Statement Analysis and Valuation. Cambridge Business Publishers.

Easton, P., Monahan, S., 2005, An evaluation of the reliability of accounting based measures of expected returns: A measurement error perspective, The Accounting Review 80, 501-538.

Abstract:
Wedevelop an empirical method that allows us to evaluate thereliability of an expected return proxy via its association withrealized returns even if realized returns are biased and noisymeasures of expected returns. We use our approach to examineseven accounting-based proxies that are imputed from prices and contemporaneousanalysts’ earnings forecasts. Our results suggest that, for the entirecross section of firms, these proxies are unreliable. None of themhas a positive association with realized returns, even after controllingfor the bias and noise in realized returns attributable tocontemporaneous information surprises. Moreover, the simplest proxy, which is basedon the least reasonable assumptions, contains no more measurement errorthan the remaining proxies. These results remain even after weattempt to purge the proxies of their measurement error viathe use of instrumental variables and grouping. We provide additionalevidence, however, that demonstrates that some proxies are reliable whenthe consensus long-term growth forecasts are low and/or when analysts’forecast accuracy is high.

http://faculty.haas.berkeley.edu/kli/papers/Easton&Monahan-2005TAR.pdf

Easton, P. and G. Sommers, 2007. Effect of analysts’ optimism on estimates of the expected rate of return implied by earnings forecasts. Journal of Accounting Research 45, 983-1016.

Abstract:
Recent literature has used analysts’ earnings forecasts, which are known to be optimistic, to estimate implied expected rates of return; yielding upwardly biased estimates. We estimate that the bias, computed as the difference between the estimates of the implied expected rate of return based on analysts’ earnings forecasts and estimates based on current earnings realizations, is 2.84 percent. The importance of this bias is illustrated by the fact that several extant studies estimate an equity premium in the vicinity of 3 percent, which would be eliminated by the removal of the bias. We illustrate the point that cross-sample differences in the bias may lead to the erroneous conclusion that cost of capital differs across these samples by showing that analysts’ optimism and, hence, bias in the implied estimates of the expected rate of return, differs with firm size and with analysts’ recommendation. As an important aside, we show that the bias in a value-weighted estimate of the implied equity premium is 1.60 percent and that the unbiased value-weighted estimate of this premium is 4.43 percent.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=971027

Easton, P., Taylor, G., Shroff, P., Sougiannis, T., 2002, Using forecasts of earnings to simultaneously estimate growth and the rate of return on equity investment, Journal of Accounting Research 40, 657-676.

Abstract:
We develop a method for simultaneously estimating the cost of equity capital and the growth in residual earnings that are implied by current stock prices, current book value of equity, and short-term forecasts of accounting earnings. We demonstrate the use of our method by calculating the expected equity risk premium. Our estimate is higher than estimates in extant studies that are based on the same earnings forecast data. The main difference between our study and these papers is that while they provide arguments supporting an assumed rate of growth beyond the forecast horizon, we estimate this rate.

http://faculty.haas.berkeley.edu/kli/papers/Easton_et_al-2002JF.pdf

Fama, E., and French, K. (1988). Dividend yields and expected stock returns. Journal of Financial Economics 22: 3-25.

ABSTRACT & ARTICLE ARE NOT AVAILABLE

Fama, E., and French, K. (1992). The cross-section of expected stock returns. The Journal of Finance 47(2): 427-465.

NO ABSTRACT

http://home.business.utah.edu/finmll/fin787/papers/famafrench1992.pdf

Fama, E., and French, K. (1998). Value versus growth: The international evidence. The Journal of Finance 53(6): 1975-1999.

Abstract:
Value stocks have higher returns than growth stocks in markets around the world. For 1975-95, the difference between the average returns on global portfolios of high and low book-to-market stocks is 7.60% per year, and value stocks outperform growth stocks in 12 of 13 major markets. An international CAPM cannot explain the value premium, but a two-factor model that includes a risk factor for relative distress captures the value premium in international returns.

https://umdrive.memphis.edu/ywu/www/business/Investment%20Theory/4%20The%20Efficient%20Markets%20Hypothesis/Over-reaction%20and%20Momentum/FF_valuevsgrowth_intern_JOF98.pdf

Feltham, G., Ohlson, J., 1995. Valuation and clean surplus accounting for operating and financial activities. Contemporary Accounting Research 11, 689–731.

Abstract:
This paper models the relation between a firm’s market value and accounting data concerning operating and financial activities. Book value equals market value for financial activities, but they can differ for operating activities. Market value is assumed to equal the net present value of expected future dividends, and is shown, under clean surplus accounting, to also equal book value plus the net present value of expected future abnormal earnings (which equals accounting earnings minus an interest charge on opening book value). A linear model specifies the dynamics of an information set that includes book value and abnormal earnings for operating activities. Model parameters represent persistence of abnormal earnings, growth, and accounting conservatism. The model is sufficiently simple to permit derivation of closed form expressions relating market value to accounting data and other information. Three kinds of analyses develop from the model. The first set deals with value as it relates to anticipated realizations of accounting data. The second set examines in precise terms how value depends on contemporaneous realizations of accounting data. The third set examines asymptotic relations comparing market value to earnings and book values, and how earnings relate to beginning of period book values. The paper demonstrates that in all three sets of analyses the conclusions hinge on the extent to which the accounting is conservative as opposed to unbiased. Further, the absence/presence of growth in operating activities is relevant if, and only if, the accounting is conservative.

http://faculty.haas.berkeley.edu/kli/papers/Feltham&Ohlson-1995CAR.pdf

Francis, J., P. Olsson, and D. Oswald, 2000. Comparing the accuracy and explainability of dividend, free cash flow and abnormal earnings equity valuation models. Journal of Accounting Research 38, 45-70.

Abstract:
The article uses empirical evidence to show the reliability of intrinsic value estimates derived from three theoretically equivalent valuation models, the discounted dividend (DIV) model, the discounted free cash flow (FCF) model, and the discounted abnormal earnings (AE) model. The authors of this article use Value Line (VL) annual forecasts of the elements in these models to calculate value estimates for a sample of publicly traded firms followed by Value Line during 1989-93. The authors contrast the reliability of value estimates in terms of their accuracy and in terms of their explainability.

http://faculty.haas.berkeley.edu/kli/papers/Francis_et_al-2000JAR.pdf

Foster, G., Olsen, C., & Shevlin, T. (1984). Earnings releases, anomalies, and the behavior of security returns. Accounting Review 59(4): 574-603.

NO ABSTRACT AVAILABLE

http://www.investmentanomalies.com/articles/041.pdf

Galdi and Lopes (2010). Limits to arbitrage and value investing: Evidence from Brazil.

Abstract:
In this paper we show that the results obtained by accounting-based fundamental analysis strategies observed in the US market (Piotroski, 2000 and Mohanram, 2005) cannot be completed extended to other markets. Using Brazil as an experiment, standard tests show the apparent usefulness of financial statement analysis as an effective investment tool. However, additional investigation demonstrates that the significant returns generated by these strategies disappear when properly controlled by limitations on the actions of arbitrageurs. These results contribute to the literature that tries to address the impact of limits to arbitrage on some well reported capital markets phenomena related to financial reporting.

http://www.people.hbs.edu/estafford/Papers/LimitedArbitrage.pdf

http://ssrn.com/abstract=1099524.

Hirschey, M. (2000). The “dogs of the Dow” myth. The Financial Review. 35: 1-16.

Abstract:
The “Dogs of the Dow” (or “Dow Dog”) investment strategy, is a popular investment approach that promises huge abnormal returns for investors in the ten top yielding stocks from the Dow Jones Industrial Average (DJIA). However, periods of evident outperformance are balanced by periods of conspicuous underperformance. When strategy returns are adjusted for taxes and rebalancing costs, Dow Dogs perform in line with the DJIA over the 1961–1998 period. As a result, there is no robust evidence of an average return anomaly tied to Dow Dogs.

http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6288.2000.tb01411.x/abstract

Guay, W., 2000. Discussion of value investing: The use of historical financial statement information to separate winners from losers. Journal of Accounting Research 38 (Supplement), 43-51

Hirshleifer, D., Hou, K., Teoh, S., and Zhang, Y. (2004). Do investors overvalue firms with bloated balance sheets? Journal of Accounting and Economics 38: 297-331.

Abstract:
Hirshleifer et al. (2004) argue that scaled Net Operating Assets (NOA) measure the animated porn extents to which operating/reporting outcomes provoke excessive investor optimism. In this paper, I argue that at least part of the information conveyed by NOA is industry common and cannot be diversified away when forming industry portfolios conditioning on NOA. If investors do not see through NOA that come in part from inter-industry differences, then investor misperceptions should be related to both the industry and the firm-specific components of NOA. Consistent with this hypothesis, in the 1964-2002 sample, both the cross industry and the within industry components of NOA are strong negative predictors for future stock returns. In contrast, I find that the Accruals effect of Sloan (1996) comes entirely from the industry-adjusted component of Accruals. The industry NOA trading strategy survives the statistical arbitrage test introduced by Hogan et al. (2004), which is designed to distinguish between risk premium and mispricing explanations. I also examine the importance of the time series aggregation property of NOA and its inclusion of investment information, and provide evidence that the industry NOA effect is independent of the industry price momentum effect (Moskowitz and Grinblatt, 1999), and it is not driven by the clustering of either new equity issuance or M&A activities within industries.

http://www.columbia.edu/~kd2371/discuss/2004/HHTZ04.pdf

Holthausen, R., and Larcker, D. (1992). The prediction of stock returns using financial statement information. Journal of Accounting and Economics, 15(2-3): 373-411.

Abstract:
We examine the profitability of a trading strategy which is based on a logit model designed to predict the sign of subsequent twelve-month excess returns from accounting ratios. Over the 1978–1988 period, the average annual excess return produced by the trading strategy ranges between 4.3% and 9.5%, depending on the specific measure of excess return and weighting scheme involved. However, our implementation of the Ou and Penman (1989) trading strategy in the 1978–1988 period, which is based on a logit model that predicts subsequent unexpected earnings- per-share from accounting ratios, does not earn excess returns.

ARTICLE NOT AVAILABLE

Hou, mobile teen porn K., M. van Dijk, and Y. Zhang, 2009. The implied cost of capital: A new approach, Working paper.

Abstract:
We propose a new approach to estimate the implied cost of capital (ICC). Our approach is distinct from prior studies in that we do not rely on analysts’ earnings forecasts to compute the ICC. Instead, we use a cross-sectional model to forecast the earnings of individual firms. Our approach has two major advantages. First, it allows us to estimate the ICC for a much larger sample of firms over a much longer time period. Second, it is not affected by the various issues that lead to the well-documented biases in analysts’ forecasts. Our cross-sectional earnings model delivers earnings forecasts that outperform consensus analyst forecasts. We show that, as a result, our approach to estimate the ICC produces a more reliable proxy for expected returns than other approaches. We present evidence on the implications for the equity premium and a variety of asset pricing anomalies.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1561682

Lev, B., and Thiagarajan, S. (1993). Fundamental information analysis. Journal of Accounting Research 31(2), 190-215.

Abstract:
This article presents a study aimed at extending and linking several lines of investigation in capital markets accounting research focusing particularly on the areas of value-relevant fundamentals. Known as fundamental analysis, it is an attempt to more precisely value corporate securities by scrutinizing earnings, risk and growth. In addition to examining the validity of fundamentals, the authors also investigate earnings persistence, growth, and the earnings response coefficient, and their use by investors.

http://faculty.haas.berkeley.edu/kli/papers/Lev&Thiagaraian-1993JAR.pdf

Lewellen, J. (2004). Predicting returns with financial ratios. Journal of Financial Economics 74 (2): 209-235.

Abstract:
This article studies whether financial ratios like dividend yield can predict aggregate stock returns. Predictive regressions are subject to small-sample biases, but the correction used by prior studies can substantially understate forecasting power. I show that dividend yield predicts market returns during the period 1946–2000, as well as in various subsamples. Book-to-market and the earnings-price ratio predict returns during the shorter sample 1963–2000. The evidence remains strong despite the unusual price run-up in recent years.

http://dspace.mit.edu/bitstream/handle/1721.1/1805/4374-02.pdf?sequence=1

Lundholm, R., and T. O.Keefe. 2001. Reconciling value estimates from the discounted cash flow model and the residual income model. Contemporary Accounting Research 18, 311–35.

Abstract:
This paper examines why practitioners and researchers get different estimates of equity value when they use a discounted cash flow (CF) model versus a residual income (RI) model. Both models are derived from the same underlying assumption – that price is the present value of expected future net dividends discounted at the cost of equity capital – but in practice and in research they frequently yield different estimates. We argue that the research literature devoted to comparing the accuracy of these two models is misguided; properly implemented, both models yield identical valuations for all firms in all years. We identify how prior research has applied inconsistent assumptions to the two models and show how these seemingly small errors cause surprisingly large differences in the value estimates.

http://webuser.bus.umich.edu/lundholm/mywebs/valuedog/lo%20-%20whole%20paper%205.pdf

Lyandres, Sun, and Zhang (2008)-  Investment/Assets predicts future returns The New Issues Puzzle: Testing the Investment-Based Explanation (with Le Sun and Lu Zhang), Review of Financial Studies, 21 (6), November 2008

Abstract:
An investment factor, long in low investment stocks and short in high investment stocks, helps explain the new issues puzzle. Adding the investment factor into standard factor regressions reduces on average about 75% of the SEO underperformance, 80% of the IPO underperformance, 50% of the underperformance following convertible debt offerings, and 40% of Daniel and Titman’s (2006) composite issuance effect. The reason is that issuers invest more than nonissuers, and the investment factor earns a significantly positive average return of 0.57% per month.

www.ruf.rice.edu/~lyandres/NewIssues07Jan.pdf

Mohanram, P. (2005). Separating winners from losers among low book-to-market Stocks using financial statement analysis. Review of Accounting Studies 10: 133-170.

Abstract:
This paper tests whether a strategy based on financial statement analysis of low book-to-market (growth) stocks is successful in differentiating between winners and losers in terms of future stock performance. I create an index (G_SCORE) based on a combination of traditional fundamentals such as earnings and cash flows and measures appropriate for growth firms such as the stability of earnings and growth and the intensity of R&D, capital expenditure and advertising. A strategy based on buying high G_SCORE firms and shorting low G_SCORE firms consistently earns significant excess returns. The results are robust across partitions based on size, stock price, analyst following, exchange listing and prior performance and are not affected by the inclusion or omission of IPO firms. The excess returns persist after controlling for well documented risk and anomaly factors such as momentum, book-to-market, accruals and size. The stock market in general and analysts in particular are much more likely to be positively surprised by firms whose growth oriented fundamentals are strong, indicating that the stock market fails to grasp the future implications of current fundamentals. Further, the results do not support a risk based explanation for the book-to-market effect as the strategy returns positive returns in all years, and firms that ex-ante appear less risky have better future returns. To conclude, one can use a modified fundamental analysis strategy to identify mispricing and earn substantial abnormal returns.

http://www.rotman.utoronto.ca/facbios/file/rast%20growth.pdf

Noma, M. (2010). Value investing and financial statement analysis. Hitosubashi Journal of Commerce and Management. 44: 29-46.

Abstract:
This study investigates whether a simple accounting-based fundamental analysis can outperform the market. In this study, I use a fundamental signal (F_SCORE) to discriminate between eventual winners and losers. F_SCORE is based on a combination of traditional fundamentals such as ROA, cash flow from operations, and operating margin. I demonstrate that the mean return can be increased by at least 7.8% through hedging strategy that buys high F_SCORE firms and that shorts low F_SCORE firms. In particular, an investment strategy that buys high book-to-market (BM) firms with high F_SCORE and shorts low BM firms with low F_SCORE earns a 17.6% annual return. In other words the results are robust across a variety of partitions including size, share price, and trading volume. This study reveals that F_SCORE can predict future earnings. Further, empirical results do not support a risk-based explanation for the investment strategy. Overall, the results of the present study suggest that life cycle hypothesis advocated by Lee and Swaminathan[2000] holds true.

http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/18701/1/HJcom0440100290.pdf

O’Higgins, M. and J. Downs (1991). Beating the Dow. HarperCollins Publishers, New York, NY.

Ohlson, J., 1990. A synthesis of security valuation theory and the role of dividends, cash flows, and earnings. Contemporary Accounting Research 6, 648–676.

Abstract:
The paper reviews and synthesizes modern finance valuation theory and the ways it relates to the valuation of firms and accounting data. These models permit uncertainty and multiple dates, and the concept of intertemporal consistency in equilibria becomes critical. The key conclusions are (1) the basic theoretical insight derives from a powerful condition of no arbitrage; there is no role for complete markets in basic valuation theory; (2) only anticipated dividends can serve as a generically valid capitalization (present value) attribute of a security; (3) the notion of risk is general, and models such as the CAPM occur only as special cases; (4) the notion that one can capitalize cash flows rather than dividends requires additional (relatively stringent) assumptions; (5) existing theory of “pure” earnings under uncertainty lacks unity regarding their meaning and characteristics. It is argued that only one concept of “pure” earnings makes economic sense. In this case earnings are sufficient to determine a security’s pay-off, price plus dividends, consistent with some prior research but inconsistent with others.

http://faculty.haas.berkeley.edu/kli/papers/Ohlson-1990CAR.pdf

Ohlson, J., 1995. Earnings, book-values, and dividends in equity valuation. Contemporary Accounting Research 11, 661–687.

Abstract:
The paper develops and analyzes a model of a firm’s market value as it relates to contemporaneous and future earnings, book values, and dividends. Two owners’ equity accounting constructs provide the underpinnings of the model: the clean surplus relation applies, and dividends reduce current book value but do not affect current earnings. The model satisfies many appealing properties, and it provides a useful benchmark when one conceptualizes how market value relates to accounting data and other information.

http://www.metu.edu.tr/~mugan/Ohlson%201995%20earnings%20bv%20div%20in%20eq%20valuation.pdf

Ohlson, J., 2001., Earnings, book values and dividends in equity valuation: An empirical perspective. Contemporary Accounting Research 18, 107-120.

Abstract:
This paper revisits Ohlson 1995 to make a number of points not generally appreciated in the literature. First, the residual income valuation (RIV) model does not serve celebrity nude as a crucial centerpiece in the analysis. Instead, RIV plays the role of condensing and streamlining the analysis, but without any effect on the substantive empirical conclusions. Second, the concept of “other information” in the model can be given concrete empirical content if one presumes that next-period expected earnings are observable.

http://www.uic.edu/classes/actg/actg593/Readings/Z-Readings/Finacial-Accounting-Theory/OHLSON,%20JAMES%20A%3B%20Earnings,%20Book%20Values,%20&%20Dividends%20In%20Equity%20Valuation-%20An%20Empirical%20Perspective.pdf

Ohlson, J., 2005. On accounting-based valuation formulae. Review of Accounting Studies 10: 323-347.

Abstract:
This paper considers accounting-based valuation formulae. Its initial focus is on two problems related to residual income valuation (RIV). First, insofar valuation depends on theresent value of expected dividends per share, applying RIV requires clean surplus accounting on a per share basis. Awkwardly, equity transactions that change the number of shares outstanding generally imply eps ≠ Δ bvps − dps. A clean surplus equality holds only if one “re-conceptualizes” either end-of-period bvps or eps as a forced “plug”. Second, one cannot circumvent the per share issue by evaluating RIV on a total dollar value basis unless one introduces relatively subtle MM-type restrictions. In light of RIV’s unsatisfactory aspects, the paper proposes an alternative to RIV. This new approach maintains a strict eps-focus. It derives by replacing bvps t in RIV with eps t +1 capitalized (i.e. divided by r). One obtains a formula such that the current market price equals next-period expected earnings capitalized plus the present value of expected abnormal earnings growth, referred to as AEG. A number of propositions then demonstrate the advantages of the AEG approach as compared to RIV. These results follow because eps t+1 capitalized generally approximates market price better than bvps t .

http://faculty.haas.berkeley.edu/kli/papers/Ohlson-2005RAS.pdf

Ohlson, J., 2009. Accounting data and value: The basic results. Contemporary Accounting Research (26), 231-259.

Abstract:
This paper develops the basic results relating equity value to accounting data–earnings, book values, and dividends. It contributes by stating all results in simple analytical terms and by gradually bringing out constructs that lead to more, sophisticated modeling. A thorough analysis of permanent earnings and economic earnings provides the starting point because of black porn videos their status as benchmark models. The paper then proceeds by adding features that lead to models with empirical content. Four themes recur throughout. First, the analysis considers both earnings and book values and it shows how their differential properties influence the conceptualization of value. Second, earnings dominate book values as a relevant valuation attribute. Third, much of the analysis centers on explaining the price-to- forward-earnings ratio. Fourth, all insights exploit the (Modigliani and Miller) notion that wealth creation can be conceptualized as being something quite distinct from wealth distribution.

http://faculty.haas.berkeley.edu/kli/papers/Ohlson-2009CAR.pdf

Ohlson, J., and Z. Gao, 2006. Earnings, earnings growth and value. Foundations and Trends in Accounting 1, 1-70.

Abstract:
A recent paper by Ohlson and Juettner-Nauroth (2005) develops a model in which a firm’s expected earnings and their growth determine its value. At least on its surface, the model appeals because it embeds the core principle used in investment practice and, further, generalizes the Constant Growth model (Gordon and Williams) without restricting the firm’s dividend policy. This text reviews the valuation model and its properties. It also extends previous results by analyzing a number of issues not adequately covered in the original paper. These topics include the precise nature of dividend policy irrelevancy, how the model relates to other well-known valuation models, the role of accounting principles, and how it can be developed on the basis of an underlying information dynamics. A central result shows why the model should be accorded “benchmark” status.

www.nowpublishers.com/getpdf.aspx?doi=1400000001&product=ACC

Ohlson, J. and Juettner-Nauroth, 2005. Expected eps and eps growth as determinants of value. Review of Accounting Studies 10, 349-365.

Abstract:
This paper develops a parsimonious model relating a firm’s price per share to, (i), next year expected earnings per share (or 12 months forward eps), (ii), short-term growth (FY-2 versus FY- l) in eps, (iii), long-term (asymptotic) growth in eps, and, (iv), cost-of-equity capital. The model assumes that the present value of dividends per share (dps) determines price, but it does not restrict how the dps-sequence is expected to evolve. All of these aspects of the model contrast sharply with the standard (Gordon/Williams) text-book approach, which equates the growth rates of expected eps and dps and fixes the growth rate and the payout rate. Though the constant growth model arises as a peculiar special case, the analysis in this paper rests on more general principles, including dividend policy irrelevancy. A second key result inverts the valuation formula to show how one expresses cost-of-capital as a function of the forward eps to price ratio and the two measures of growth in expected eps. This expression generalizes the text-book equation in which cost-of-capital equals the dps-yield plus the growth in expected eps.

http://faculty.haas.berkeley.edu/kli/papers/Ohlson-2009CAR.pdf

Ou, J., and Penman, S. (1989). Financial statement analysis and the prediction of stock returns. Journal of Accounting and Economics 11(4): 295-329.

Abstract:
This paper performs a financial statement analysis that combines a large set of financial statement items into one summary measure which indicates the direction of one-year-ahead earnings changes. Positions are taken in stocks on the basis of this measure during the period 1973–1983, which involve canceling long and short positions with zero net investment. The two-year holding-period return to the long and short positions is in the order of 12.5%. After adjustment for ‘size effects’ the return is about 7.0%. These returns cannot be explained by nominated firm risk characteristics.

NO ARTICLE AVAILABLE

Papanastasopoulos, George A., Thomakos, Dimitrios D. and Wang, Tao, Information in Balance Sheets for Future Stock Returns: Evidence from Net Operating Assets (April 25, 2009).

http://ssrn.com/abstract=937361

Abstract:
In this paper, we show that the negative relation of net operating assets (NOA) with future stock returns first documented by Hirshleifer et al. (2004) applies to both net working and investing pieces of NOA, while it is mostly driven by asset NOA components. Predictability of returns is significant only for their unexpected parts (unrelated to past sales growth) and not uniform across different industries. We also find that only high (low) NOA firms with asset expansion (contraction) and weak (strong) background of profitable investments exhibit negative (positive) abnormal returns. Our evidence suggests that the NOA anomaly may be present due to a combination of opportunistic earnings management and agency related overinvestment.

Penman, S., & Zhang, X.-J. (2002). Accounting conservatism, the quality of earnings, and stock returns. Accounting Review 77(2): 237-264.

Abstract:
Quality of earnings questions arise when firms that practice conservative accounting change the level of their investment in net operating assets: increases in net operating assets create “hidden reserves,” depressing viagra online earnings, and decreases in investment release hidden reserves into earnings. This paper develops diagnostics that capture this joint effect of investment and conservative accounting and finds that the diagnostics forecast differences in future return on net operating assets from the current return on net operating assets. Moreover, the diagnostics forecast stock returns, indicating that the stock market does not appreciate how conservatism and investment combine to raise quality questions about reported earnings.

http://www.bmibourse.org/Report%5CFiles%5Caccounting%20conservatism%20the%20quality%20of%20earnings%20and%20stock%20returns.pdf

Piotroski, J. (2000). Value investing: The use of historical financial statement information to separate winners from losers. Journal of Accounting Research 38: 1-41.

Abstract:
This paper examines whether a simple accounting-based fundamental analysis strategy, when applied to a broad portfolio of high book-to-market firms, can shift the distribution of returns earned by an investor. I show that the mean return earned by a high book-to-market investor can be increased by at least 7 percent annually through the selection of financially strong high BM firms while the entire distribution of realized returns is shifted to the right. In addition, an investment strategy that buys expected winners and shorts expected losers generates a 23 percent annual return between 1976 and 1996 and the strategy appears to be robust across time and to controls for alternative investment strategies. Within the portfolio of high BM firms, the benefits to financial statement analysis are concentrated in small and medium sized firms, companies with low share turnover and firms with no analyst following, yet this superior performance is not dependent on purchasing firms with low share prices. A positive relationship between the sign of the initial historical information and both future firm performance and subsequent quarterly earnings announcement reactions suggests that the market initially underreacts to the historical information. In particular, 1/6th of the annual return difference between ex ante strong and weak firms is earned over the four three-day periods surrounding these quarterly earnings announcements. Overall, the evidence suggests that the market does not fully incorporate historical financial information into prices in a timely manner.

http://www.mir.com.au/pivotal/Piotroski.pdf

Piotroski (2000) investigates value stocks and examines whether a simple, accounting-based fundamental analysis strategy, when applied to historical data, can further enhance the returns to investing in high book-to-market firms. This discussion of Piotroski [2000] focuses on two main issues. The first issue is general, and questions whether the empirical literature on pricing anomalies can advance our understanding of pricing behavior in the absence of a plausible and rejectable alternative hypothesis to market efficiency. The second issue is more specific, and explores whether the author’s analysis of the data provides convincing evidence that a simple accounting-based trading strategy, when applied to high book-to-market firms, generates substantial abnormal returns?

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=249510

La mom sex Porta, R. (1996). Expectations and the cross-section of stock returns. The Journal of Finance 51(5): 1715-1742.

Abstract:
Previous research has shown that stocks with low prices relative to book value, cash flow, earnings, or dividends (that is, value stocks) earn high returns. Value stocks may earn high returns because they are more risky. Alternatively, systematic errors in expectations may explain the high returns earned by value stocks. I test for the existence of systematic errors using survey data on forecasts by stock market analysts. I show that investment strategies that seek to exploit errors in analysts’ forecasts earn superior returns because expectations about future growth in earnings are too extreme.

http://mba.tuck.dartmouth.edu/pages/faculty/rafael.laporta/publications/Expectations.pdf

Quirin J, Berry K. A Fundamental Analysis Approach to Oil and Gas Firm Valuation. Journal of Business Finance & Accounting [serial online]. September 2000;27(7/8):785-820.

http://www.investmentanomalies.com/articles/053.pdf

Abstract:
Reports the results of a fundamental analysis of the United States oil and gas industry using variables identified by industry financial analysts. Focus of fundamental analysis studies on fundamentals selected by a data-driven approach; Relationship between a number of fundamental with both the market value of equity and cumulative stock return; Information from the fundamentals.

Richardson, S., R. Sloan, and I. Tuna, 2006. Balance sheet information and future stock returns. Working paper

Abstract:
Numerous studies have documented that the most recent annual change in net operating assets is negatively related to future stock returns. In recent work, Hirshleifer, Hou, Teoh and Zhang (2004) show that the level of net operating assets scaled by the previous year’s total assets is also negatively related to future returns. They argue that their levels variable is superior to the change variable used in prior research because it picks up cumulative past changes, rather than just the most recent annual change. We point out that deflation of a level by a lagged level produces a change. As such, their level variable is similar to the change variable used in prior research, and their claim that it picks up cumulative past changes in net operating assets is misleading.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=918135

Richardson, G., and S. Tinaikar, 2004. Accounting based valuation models: What have we learned? Accounting and Finance 44, 223-255.

Abstract:
The present survey article formed the basis of a presentation by G. Richardson to the 8 July 2003 plenary session of the Accounting and Finance Association of Australia and New Zealand Conference in Brisbane, Australia. The present article reconciles the historical and forecasting branches in the published accounting literature. Prior survey articles have primarily focused either on the historical branch or the forecasting branch. While these approaches have yielded useful insights, they do not attempt to synthesize the link between the two branches of the published literature. An obvious link between the two branches is that the Ohlson model begins with the Residual Income Model as an initial assumption. We believe that there are other links that need further emphasis. In the process, we also review the empirical issues and the evidence within these two branches. We know of no paper to date that has surveyed the empirical evidence on both the historical and forecasting branches of the published literature. In particular, we draw inferences on the following question: on balance, what have we learned from nearly a decade of research on accounting based valuation models and its applications?

http://faculty.haas.berkeley.edu/kli/papers/Richardson&Tinaikar-2004AF.pdf

Shumway, T. (2001). Forecasting bankruptcy more accurately: A simple hazard model. Journal of Business .

Abstract:
I argue that hazard models are more appropriate for forecasting bankruptcy than the single-period models used previously. Single-period bankruptcy models give biased and inconsistent probability estimates while hazard models produce consistent estimates. I describe a simple technique for estimating a discrete-time hazard model with a logit model estimation program.

Applying my technique, I find that about half of the accounting ratios that have been used in previous models are not statistically significant bankruptcy predictors. Moreover, several market-driven variables are strongly related to bankruptcy probability, including market size, past stock returns, and the idiosyncratic standard deviation of stock returns. I propose a model that uses a combination of accounting ratios and market-driven variables to produce more accurate out-of-sample forecasts than alternative models.

ftp://iies.faces.ula.ve/Banca/Publicaciones_cientificas_sobre_Riesgo_Bancario/Fragilidad%20Financiera/Crisis%20financieras/quiebra%20prediccion%20y%20modelos/Modelo%20Simple%20de%20Hazard%20para%20predecir%20bancarrota.pdf [NOT AVAILABLE]

Sloan, R. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? Accounting Review 71(3): 289-315.

Abstract:
This paper investigates whether stock prices reflect information about future earnings contained in the accrual and cash flow iphone porn components of current earnings. The extent to which current earnings performance persists into the future is shown to depend on the relative magnitudes of the cash and accrual components of current earnings. However, stock prices are found to act as if investors “fixate” on earnings, failing to fully reflect information in the accrual and cash flow components of current earnings until it impacts future earnings.

http://acct.tamu.edu/Giroux/Sloan%281996%29.pdf

Soliman, M. (2008). The use of DuPont analysis by market participants. The Accounting Review 83: 823-853.

Soliman, hot gay porn M. 2008 The use of DuPont analysis by market participants. The Accounting Review 8, 823-853.

Abstract:
DuPontanalysis, a common form of financial statement analysis, decomposes returnon net operating assets into two multiplicative components: profit marginand asset turnover. These two accounting ratios measure different constructsand, accordingly, have different properties. Prior research has found thata change in asset turnover is positively related to futurechanges in earnings. This paper comprehensively explores the DuPont componentsand contributes to the literature along three dimensions. First, thepaper contributes to the financial statement analysis literature and findsthat the information in this accounting signal is in factincremental to accounting signals studied in prior research in predictingfuture earnings. Second, it contributes to the literature on thestock market’s use of accounting information by examining immediate andfuture equity return responses to these components by investors. Finally,it adds to the literature on analysts’ processing of accountinginformation by again testing immediate and delayed response of analyststhrough contemporaneous forecast revisions as well as future forecast errors.Consistent across both groups of market participants, the results showthat the information is useful as evidenced by associations betweenthe DuPont components and stock returns as well as analystforecast revisions. However, I find predictable future forecast errors andfuture abnormal returns indicating that the information processing does notappear to be complete. Taken together, the analysis indicates thatthe DuPont components represent an incremental and viable form ofinformation about the operating characteristics of a firm.

http://faculty.haas.berkeley.edu/kli/papers/Soliman-2008TAR.pdf

Sun, hentai movie Yan, Do MD&A Disclosures Help Users Interpret Disproportionate Inventory Increases? (December 1, 2009). AAA 2007 Financial Accounting & Reporting Section (FARS) Meeting.

Abstract:
This study investigates whether MD&A disclosures have predictive ability for future firm performance in cases of disproportionate inventory increases. Using a sample of 568 manufacturing firms with disproportionate inventory increases, I find that the favorability of explanations for inventory changes in MD&A is positively associated with a firm’s profitability and sales growth in the subsequent three years. I also find that future profitability and sales growth of firms that do not explain disproportionate inventory increases in MD&A fall between those of firms with favorable explanations and firms with unfavorable explanations. These results suggest that the existence of and the favorability of MD&A inventory disclosures help users interpret disproportionate inventory increases and predict future firm performance.

http://ssrn.com/abstract=930471

E Suwardi – 2004 – eprints.qut.edu.au. Exploring The Relationship Between Market Values And Accounting Numbers of Firms Listed In An Emerging Market, Eko Suwardi California State University Fresno (MS Accounting) 1994 Gadjah Mada University (Sarjana / BA. … Cited by 2 – Related articles – All 5 versions

http://eprints.qut.edu.au/15986/1/Eko_Suwardi_Thesis.pdf

Abstract:
Studies of the relationship between market values and accounting numbers have long been a part of an established theme in capital markets research (CMR).  These studies have taken various forms, most being conducted on a cross sectional basis, tied closely with the assumptions of equilibrium behavior and efficient markets.  Explanatory variables for market value have been dominated by firm-specific variables without incorporating macroeconomic variables.  Recently, however, some studies have employed macroeconomic variables and dynamic specification in assessing the relationship between market values and accounting numbers (e.g. Bilson et al. 2001, Nissim and Penman, 2003, and Willett, 2003).

The objective of this thesis is to investigate the nature of the relationship between share prices and accounting numbers on the Jakarta Stock Exchange for the period 1992-2002, using dynamic modeling principles in addition to the more usual cross sectional analysis.  The approach to regression modeling (general-to-specific strategy) incorporated in this thesis relies less heavily than most CMR on prior economic theories of equilibrium behavior.  Apart from these novel aspects of approach and method, the study also provides valuable information about the emerging financial markets of Indonesia.The results of this thesis show that cointegration and the accompanying equilibrium correction relationship between market and book values for firms listed on the Jakarta Stock Exchange (JSX) can often be identified using accounting and macroeconomic regressors.  The models are typically more informative, plausible and consistent than cross-sectional models and are useful in interpreting the context in which the market to book relationship exists in Indonesia.  A possibly surprising result is that in Indonesia, compared to similar models estimated using US data, the book value of net assets seems to have a stronger relationship with market value.  This may be a function of the relative importance of financial statements as a source of information on the JSX.

Titman, S., Wei, K., and Xie, F. (2004). Capital investments and stock returns. Journal of Financial and Quantitative Analysis 39(4): 677-700.

Abstract:
Firms that substantially increase buy zithromax capital investments subsequently achieve negative benchmark-adjusted returns. The negative abnormal capital investment/return relation is shown to be stronger for firms that have greater investment discretion, i.e., firms with higher cash flows and lower debt ratios, and is shown to be significant only in time periods when hostile takeovers were less prevalent. These observations are consistent with the hypothesis that investors tend to underreact to the empire building implications of increased investment expenditures. Although firms that increase capital investments tend to have high past returns and often issue equity, the negative abnormal capital investment/return relation is independent of the previously documented long-term return reversal and secondary equity issue anomalies.

http://faculty.haas.berkeley.edu/kli/papers/Titman_et_al-2004JFQA.pdf

Summary – Abnormal Corporate Investment Predicts future returns .Titman et al. (2004) document that  firms with high ACI values earn significantly lower average returns than firms with low ACI values, and interpret the evidence as suggesting that “investors tend to under react to the empire building implications of increased investment expenditures ACI used for the portfolio formation year t as ACIt-1 =3CEt-1 /(CEt-2 + CEt-3 + CEt-4 )-1, in which CEt-1 is capital expenditures(COMPUSTAT annual item CAPX) divided by sales(item SALE) for the fiscal year ending in calendar year t-1. The prior three-year moving average of capital expenditures is designed to project the benchmark level of investment for the fiscal year t-1. An ACI value greater than zero indicates that the past fiscal year’s investment is greater than the average over the prior three years: in this sense, ACI can be interpreted as a measure of abnormal investment.

Tortoriello, R. (2009). Quantitative Strategies for Achieving Alpha. New York, NY: McGraw-Hill.

Wei, K. C. John K.C., Xie, Feixue and Titman, Sheridan , Capital Investments and Stock Returns (April 2001).

http://ssrn.com/abstract=268538

Abstract:
Firms that spend the most on capital investments relative to their sales or total assets, subsequently achieve negative benchmark-adjusted returns. We consider two hypotheses to explain these returns. The first explanation, that firms artificially increase cash flows to fund investment expenditures, suggests that the negative relation between returns and investment expenditures should be strongest for the most financially constrained firms. The second explanation, that firms that invest a lot tend to be over-investing, suggests that the negative relation between returns and investment expenditures should be strongest for firms with the most financial slack. The evidence tends to support the second explanation. That is, the negative capital investment/return relation is stronger for firms with higher cash flows and lower debt ratios and reverses in the period when firms of this type were subject to hostile takeovers.

Xue, Yanfeng and Zhang, May H., Fundamental Analysis, Institutional Investment, and Limits to Arbitrage (August 1, 2008).

Abstract:
Previous research documents that financial ratios (fundamental signals) derived from publicly available financial statements can predict future abnormal stock returns. This paper examines whether institutional investors trade on these fundamental signals and the implications of institutional investors’ trading for stock valuation. We provide evidence that transient institutional investors (institutions who actively trade securities for short-term returns) trade on fundamental signals. We also show that the abnormal returns associated with fundamental signals increase with transaction costs and arbitrage risk, indicating the existence of the limits to arbitrage for this investment strategy. We further document that transient institutions trade less aggressively to exploit the fundamental-signal-based trading strategy in firms with higher transaction costs and arbitrage risk, and their arbitrage trades help reduce the returns related to fundamental signals. This paper provides evidence helping to explain the abnormal returns associated with fundamental signals and contributes to our understanding of institutional investors’ role in enhancing market efficiency.

http://ssrn.com/abstract=788125

Zhang, Cao, and Schniederjans [W. Zhang, Q. Cao, M. Schniederjans, Neural Network Earnings Per Share Forecasting Models: A Comparative Analysis of Alternative Methods. Decision Sciences 35(2) (2004), 205–237, hereafter ZCS]

Abstract:
ZCS examined the relative ability of neural network models to forecast earnings per share. Their results indicate that the univariate NN model significantly outperformed four alternative univariate models examined in prior research. The authors also found that a neural network forecasting model incorporating fundamental accounting signals outperformed two variations of the multivariate forecasting model examined by Abarbanell and Bushee [J.S. Abarbanell, B.J. Bushee, Fundamental Analysis, Future EPS, and Stock Prices. Journal of Accounting Research 35(1) (1997), 1–24]. To estimate the neural network weights of their neural network models, ZCS used backward propagation (BP). In this paper we compare the forecasting accuracy of neural network weights estimated with BP to ones derived from an alternative estimation procedure, the genetic algorithm [R.S. Sexton, R.E. Dorsey, N.A. Sikander, Simultaneous Optimization of Neural Network Function and Architecture Algorithm. Decision Support Systems 36(3) (2004), 283–296]. We find that the genetic algorithm produces models that are significantly more accurate than the models examined by ZCS.

http://etd.ohiolink.edu/send-pdf.cgi/Zhang%20Yinglei.pdf?osu1116992225

Y Zhang – 2005 – etd.ohiolink.edu
Page 1. NET OPERATING ASSETS AS A PREDICTOR FOR FUTURE STOCK RETURNS
—–AN INDUSTRY ANALYSIS DISSERTATION Presented in Partial Fulfillment of the Requirement for The Degree Doctor of Philosophy in the Graduate School of the Ohio State University

Zhang, Yinglei, Net Operating Assets as a Predictor of Industry Stock Returns (April 2006).

Abstract:
Hirshleifer et al. (2004) argue that scaled Net Operating Assets (NOA) measures the extent to which operating/reporting outcomes provoke excessive investor optimism. In this paper, I argue that at least part of the information conveyed by NOA is industry common and cannot be diversified when forming industry portfolios conditioning on NOA for investors with limited attention and investor misperceptions should be related to both the industry and the firm-specific components of NOA. Consistent with this hypothesis, in the 1964-2002 sample, both the cross industry and the within industry components of NOA are strong negative predictors for future stock returns. In contrast, I find that the Accruals effect of Sloan (1996) comes entirely from the industry-adjusted component of Accruals. The industry NOA trading strategy survives the statistical arbitrage test introduced by Hogan et al. (2004), which is designed to distinguish between risk premium and mispricing explanations. I also present evidence that the industry NOA effect cannot be explained by the ICAPM (Khan 2006). Finally, I examine the importance of the time series aggregation property of NOA and its inclusion of investment information, and provide evidence that the industry NOA effect is not driven by the clustering of either new equity issuance or M&A activities within industries.

http://ssrn.com/abstract=900264

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