Swedroe: Published Results Impact Future Results

October 24, 2016

  1. Net Stock Issues: Net stock issuance and stock returns are negatively correlated. It has been shown that smart managers issue shares when sentiment-driven traders push prices to overvalued levels.
  2. Composite Equity Issues: Issuers tend to underperform nonissuers, with “composite equity issuance” defined as the growth in a firm’s total market value of equity minus its stock’s rate of return. It is computed by subtracting the 12-month cumulative stock return from the 12-month growth in equity market capitalization.
  3. Accruals: Firms with high accruals earn abnormally lower average returns than firms with low accruals. Investors overestimate the persistence of the accrual component of earnings when forming earnings expectations.
  4. Net Operating Assets: The difference on a firm’s balance sheet between all operating assets and all operating liabilities, scaled by total assets, is a strong negative predictor of long-run stock returns. Investors tend to focus on accounting profitability, neglecting information about cash profitability, in which case, net operating assets (equivalently measured as the cumulative difference between operating income and free cash flow) captures such a bias.
  5. Asset Growth: Companies that grow their total assets more earn lower subsequent returns. Investors overreact to changes in future business prospects implied by asset expansions.
  6. Investment-to-Assets: Higher past investment predicts abnormally lower future returns.
  7. Distress: Firms with high failure probability have lower, rather than higher, subsequent returns.
  8. Momentum: High (low) recent past returns forecast high (low) future returns.
  9. Gross Profitability: More profitable firms have higher expected returns than less profitable ones.
  10. Return on Assets: Again, more profitable firms have higher expected returns than less profitable firms.
  11. Book-to-Market: Firms with high book-to-market ratios have higher expected returns than firms with low book-to-market ratios.
  12. Ohlson O-Score: Stocks with a high risk of bankruptcy have lower returns than stocks with a low risk of bankruptcy.
  13. Post-Earnings Announcement Drift: The tendency for a stock’s cumulative abnormal returns to drift for several weeks (or even several months) following release of a positive earnings announcement.
  14. Capital Investment: Firms that substantially increase capital investments subsequently achieve negative benchmark-adjusted returns.


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