We examine whether stock prices fully value firms' intangible assets, specifically research and development (R&D). Under current U.S. accounting standards, financial statements do not report ...intangible assets and R&D spending is expensed. Nonetheless, the average historical stock returns of firms doing R&D matches the returns of firms without R&D. However, the market is apparently too pessimistic about beaten-down R&D-intensive technology stocks' prospects. Companies with high R&D to equity market value (which tend to have poor past returns) earn large excess returns. A similar relation exists between advertising and stock returns. R&D intensity is positively associated with return volatility.
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During the 1980s, U.S. firms announcing stock repurchases earned favorable longrun returns. Recently, concerns have been raised over the robustness of these findings. This concern comes at a time of ...explosive growth in repurchase programs. Thus, we study new evidence from the 1990s for 1,060 Canadian repurchase programs. Moreover, because of Canadian law, we can carefully track repurchase activity monthly. Similarly to the situation in the United States, the Canadian stock market discounts the information in repurchase announcements, particularly for value stocks. Completion rates in Canada are sensitive to mispricing. Trades also appear linked to price movements; managers buy more shares when prices fall.
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Contrarian Investment, Extrapolation, and Risk LAKONISHOK, JOSEF; SHLEIFER, ANDREI; VISHNY, ROBERT W.
The Journal of finance (New York),
December 1994, Volume:
49, Issue:
5
Journal Article
Peer reviewed
Open access
For many years, scholars and investment professionals have argued that value strategies outperform the market. These value strategies call for buying stocks that have low prices relative to earnings, ...dividends, book assets, or other measures of fundamental value. While there is some agreement that value strategies produce higher returns, the interpretation of why they do so is more controversial. This article provides evidence that value strategies yield higher returns because these strategies exploit the suboptimal behavior of the typical investor and not because these strategies are fundamentally riskier.
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Momentum Strategies CHAN, LOUIS K. C.; JEGADEESH, NARASIMHAN; LAKONISHOK, JOSEF
The Journal of finance (New York),
December 1996, Volume:
51, Issue:
5
Journal Article
Peer reviewed
We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular to past earnings news. Past return and past earnings ...surprise each predict large drifts in future returns after controlling for the other. Market risk, size, and book-to-market effects do not explain the drifts. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information.
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This paper tests two of the simplest and most popular trading rules--moving average and trading range break-by utilizing the Dow Jones Index from 1897 to 1986. Standard statistical analysis is ...extended through the use of bootstrap techniques. Overall, our results provide strong support for the technical strategies. The returns obtained from these strategies are not consistent with four popular null models: the random walk, the AR(1), the GARCH-M, and the Exponential GARCH. Buy signals consistently generate higher returns than sell signals, and further, the returns following buy signals are less volatile than returns following sell signals, and further, the returns following buy signals are less volatile than returns following sell signals. Moreover, returns following sell signals are negative, which is not easily explained by any of the currently existing equilibrium models.
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A great deal of academic empirical research has been published on value and growth investing. We review and update this literature, discuss the various explanations for the performance of value ...versus growth stocks, review the empirical research on the alternative explanations, and provide some new results based on an updated and expanded sample. The evidence suggests that, even after taking into account the experience of the late 1990s, value investing generates superior returns. Common measures of risk do not support the argument that the return differential is a result of the higher riskiness of value stocks. Instead, behavioral considerations and the agency costs of delegated investment management lie at the root of the value--growth spread.
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We evaluate the performance of models for the covariance structure of stock returns, focusing on their use for optimal portfolio selection. We compare the models' forecasts of future covariances and ...the optimized portfolios' out-of-sample performance. A few factors capture the general covariance structure. Portfolio optimization helps for risk control, and a three-factor model is adequate for selecting the minimum-variance portfolio. Under a tracking error volatility criterion, which is widely used in practice, larger differences emerge across the models. In general more factors are necessary when the objective is to minimize tracking error volatility.
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Fundamentals and Stock Returns in Japan CHAN, LOUIS K. C.; HAMAO, YASUSHI; LAKONISHOK, JOSEF
The Journal of finance (New York),
December 1991, Volume:
46, Issue:
5
Journal Article
Peer reviewed
Open access
This paper relates cross-sectional differences in returns on Japanese stocks to the underlying behavior of four variables: earnings yield, size, book to market ratio, and cash flow yield. Alternative ...statistical specifications and various estimation methods are applied to a comprehensive, high-quality data set that extends from 1971 to 1988. The sample includes both manufacturing and nonmanufacturing firms, companies from both sections of the Tokyo Stock Exchange, and also delisted securities. Our findings reveal a significant relationship between these variables and expected returns in the Japanese market. Of the four variables considered, the book to market ratio and cash flow yield have the most significant positive impact on expected returns.
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