Working Paper: NBER ID: w26060
Authors: Kewei Hou; Haitao Mo; Chen Xue; Lu Zhang
Abstract: The investment theory, in which the expected return varies cross-sectionally with investment, expected profitability, and expected growth, is a good start to understanding Graham and Dodd’s (1934) Security Analysis. Empirically, the q^5 model goes a long way toward explaining prominent equity strategies rooted in security analysis, including Frankel and Lee’s (1998) intrinsic-to-market value, Piotroski’s (2000) fundamental score, Greenblatt’s (2005) “magic formula,” Asness, Frazzini, and Pedersen’s (2019) quality-minus-junk, Buffett’s Berkshire, Bartram and Grinblatt’s (2018) agnostic analysis, as well as Penman and Zhu’s (2014, 2018) and Lewellen’s (2015) expected-return strategies.
Keywords: No keywords provided
JEL Codes: G12; G14; G31; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| investment factors (G31) | expected returns (G17) |
| investment theory (G11) | intrinsic-to-market value anomaly (D46) |
| high-minus-low investment portfolio (G11) | stock returns (G12) |
| return on equity (ROE) factor (D33) | performance of fundamental score strategy (G11) |
| high-minus-low ROE portfolio (G11) | stock performance (G12) |
| magic formula strategy (C69) | stock performance (G12) |
| high-quality stocks (G12) | higher returns (G12) |