Value Investing and Dynamic Capabilities
Keywords:
Value investing, dynamic capabilities, financial ratios, abnormal returnsAbstract
This paper argues for and supports an alternative explanation for sustained above normal returns earned by value investors. We posit that by using ratios that incorporate particularities of the US accounting system, value investors are, perhaps unknowingly, capturing the value-creating investments in what the field of strategic management categorizes as a dynamic capability. Using the analytical methods of finance research, we analyze 44-years of US accounting data, by using low price-to-book and other ratios, value investors create metrics that capture firms’ dynamic capability spending. The resulting abnormal returns are consistent with hypotheses grounded in strategic management.
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