E. J. Ourso College of Business
Louisiana State University
2931 Business Education Complex
Baton Rouge, LA 70803
Institutional Affiliation: Louisiana State University
NBER Working Papers and Publications
|July 2019||Security Analysis: An Investment Perspective|
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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.
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In a multiperiod investment framework, firms with high expected growth earn higher expected returns than firms with low expected growth, holding investment and expected profitability constant. This paper forms cross-sectional growth forecasts, and constructs an expected growth factor that yields an average premium of 0.82% per month (t = 9.81). The q5-model, which augments the Hou-Xue-Zhang (2015) q-factor model with the new factor, shows strong explanatory power in the cross section, and outperforms other recently proposed factor models such as the Fama-French (2018) six-factor model.
|June 2017||The Economics of Value Investing|
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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.
|November 2014||Which Factors?|
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Many recently proposed, seemingly different factor models are closely related. In spanning tests, the q-factor model largely subsumes the Fama-French (2015, 2018) 5-and 6-factor models, and the q5 model captures the Stambaugh-Yuan (2017) model. The Stambaugh-Yuan factors are sensitive to their construction, and once replicated via the standard approach, are close to the q-factors, with correlations of 0.8 and 0.84. Finally, it seems difficult to motivate the Fama-French 5-factor model from valuation theory, which predicts a positive relation between the expected investment and the expected return.
Published: Kewei Hou & Haitao Mo & Chen Xue & Lu Zhang, 2019. "Which Factors?*," Review of Finance, vol 23(1), pages 1-35. citation courtesy of