research papers on value investing

"the extreme future stock returns following extreme earnings surprises" by Jeff Doyle, Russell Lundholm and Mark Soliman, University of Michigan working paper, 2004.

This paper documents a surprisingly simple trading strategy.  Firms who beat analyst forecasts by an extreme amount, specifically, they are in the top decile of positive surprises, enjoy stock returns over the next 2 years of about 19%.  This holds with or without controls for risk (including size, beta, market-to-book) and other anomolies (accruals, pro forma earnings, SUE and momentum). 

"the predictive value of expenses excluded from pro forma earnings" by Jeff Doyle, Russell Lundholm and Mark Soliman, Review of Accounting Studies, 2003.

This paper shows that the difference between a firm's reported pro forma earnings and its true GAAP earnings is very predictive of their future cash flows and stock returns.  Basically, buy firms who exclude gains and sell firms who exclude expenses.

"value investing: the use of historical financial statement information to separate winners from losers" by Joe Piotroski, Journal of Accounting Research 2000.

This paper dredges the value portfolio (low P/B firms) to eliminate those that appear financially distressed.  It discusses an investment strategy based on a financial health index.

"information in accruals about earnings persistence and future stock returns" by Scott Richardson, Richard Sloan, Mark Soliman and Irem Tuna, University of Michigan working paper 2002.

This paper makes a thorough study of how accruals -- the difference between cash flows and reported earnings -- predict future stock returns.

"an empirical assessment of the residual income valuation model" by Dechow, Hutton and Sloan, Journal of Accounting and Economics 1999.

This paper reports some well-documented market inefficiencies based on the P/B ratio and the P/E ratio (i.e. buy dog stocks and sell glamour stocks), but also develops a value statistic that optimally combines both book value and earnings information.

"reconciling value estimates from the discounted cash flow model and the residual income model" by Lundholm and O'keefe, Contemporary Accounting Research 2000.