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The academic paper I wrote about in yesterday’s newsletter, by Tao Chu, presented results for a stock market anomaly that I was unaware of. This is the “investment anomaly”.
The anomaly bit means that the finding does not fit with the view that the stock market is efficient in pricing shares, which implies that there is no way to regularly and systematically out-performaning the market after adjusting for risk, except by chance.
The investment anomaly is the finding that firms with low levels of expenditure on corporate investments on plant, machinery and the like outperform firms with high corporate investment commitments.
Tao Shu’s 2013 paper defines the level of investment as a ratio: annual capital expenditure divided by annual sales.
Because the paper is mostly focused on the effect of another anomaly, high or low institutional volume trading in a company’s shares as opposed to private investor volumes, the testing and a results cast simultaneous light on both types of potential stock market inefficiencies (or ways of beating the stock market).
Method
Each quarter between 1980 and 2005 hundreds of companies on NYSE and AMEX were allocated to one of three categories based on the proportion of share trading by institutions rather than by private investors: Low, Medium or High.
Also, on an independent sort, each share was allocated to one of ten (decile) categories each month based on the proportion of annual sales that were pumped into capital expenditure (capex).
The first decile, “Low”, contains the 10% of companies with the lowest proportion being spent on capex.
Thus there are 30 potential groups of companies each month, 3 volume x 10 investment. Each group is tracked to see what monthly returns it gave in the three months after portfolio formation. The results are expressed in percentage return per month averaged over all the months 1980 to 2005. The sample includes 468,379 firm-months.
Results
The chart shows the results for those firms allocated to the tercile (one-third) due to low institution volume; most of these shares are traded between private investors rather than institutions. Within that low institutional volume group we can see the performance of the ten capital expenditure groups.
The difference between the returns for low capex investment firms is highly statistically significant, with low capex spenders producing 1.34% per month compared with 0.5% per month for the high capex spenders. That difference is over 10% per annum………..To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
