Working Paper: NBER ID: w23563
Authors: Kewei Hou; Haitao Mo; Chen Xue; Lu Zhang
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.
Keywords: Value Investing; Investment CAPM; Expected Returns; Security Analysis
JEL Codes: G12; G14; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investment profitability and expected investment growth (G31) | Expected returns (G17) |
| Anomaly variables (C29) | Future changes in investment-to-assets (G31) |
| Future changes in investment-to-assets (G31) | Expected returns (G17) |
| Expected investment growth (E22) | Expected returns (G17) |
| Investment growth (E22) | Expected returns (G17) |