VALUE INVESTING: SHAPING ACCOUNTING THEORY FOR PRACTICE

Abstract

The objective of this dissertation is to demonstrate the usefulness of both fundamental accounting analysis and accounting valuation theory in shaping value investment strategies to help value investors make practical trading decisions. Specifically, I will build my strategies upon Piotroski’s nine fundamental accounting analysis signals arising from the F_SCORE model (2000) and two other signals I derived from Lee’s (2014) insights about the connection between accounting valuation theory and value investing.With a sample of 6,334 firm-year observations from fiscal years 1995 to 2012, I find that my investment strategies are able to generate a mean positive market-adjusted return of at least 21.7% annually.These returns are robust across time regardless of a company’s information dissemination environment (determined by its size, share price and share trading volume) and after controlling for other sources of crossIsectional variations in returns. Also, I find that my investment strategies have the ability to yield an appropriate amount of stocks per year to prevent hedge funds from being over-leveraged and over-diversified. Furthermore, the results also show that the mean hedged returns to my investment strategies have significantly outperformed the F_SCOREnvestment strategy by at least 27.8% annually. In its entirety, my results therefore suggest that the contextual use of relevant historical and contemporaneous accounting data is effective in distinguishing between financially sound yet undervalued and financially distressed companies ex ante to the future market adjustment. The success of my investment strategies hence provides the empirical justification that lays the foundations of a bridge that conclusively link the theory and practice of value investing through accounting theory.