Using book-to-market ratio, accounting strength, and momentum to construct a value investing strategythe case of Spain

  1. Carlos Forner 1
  2. Pablo J. Vázquez Veira 1
  1. 1 Dpto. Economía Financiera y Contabilidad, University of Alicante
Revista:
Revista española de financiación y contabilidad

ISSN: 0210-2412

Año de publicación: 2019

Volumen: 48

Número: 1

Páginas: 21-49

Tipo: Artículo

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Otras publicaciones en: Revista española de financiación y contabilidad

Resumen

The weak value-growth premium of the Spanish stock market highlights the importance of enhancing the accounting-based fundamental strength of the value-growth strategy. This accounting strength is needed to detect potential errors in market expectations that result in mispriced stocks. When we select value-growth stocks whose accounting strength is incongruent with the market expectation reflected by their book-to-market ratio, the value-growth strategy becomes highly profitable. Our results are consistent with the evidence in the US market and demonstrate that stock markets with a weak value-growth premium are not necessarily free of errors in market expectations. We also demonstrate that the momentum effect allows better timing of this strategy, indicating the best time to buy and sell mispriced stocks. This effect increases profits and reduces the time needed to hold stocks to achieve these profits.

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This work was supported by the Universidad de Alicante [VIGROB-056].

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