Discussion of “Separating Winners from Losers among Low Book-to-Market Stocks using Financial Statement Analysis”

Abstract

The conference paper by Mohanram (2005) provides evidence on the success of contextual financial statement analysis in the low book-to-market (i.e., glamour) stock setting. The economic benefits of the strategy are concentrated in the identification of glamour firms that will ultimately underperform the market. In contrast to traditional accounting-based anomalies, Mohanram’s growth-based trading strategy is stronger among large, heavily followed firms, suggesting that the mechanism behind the mispricing of glamour firms is different than the traditional information environment and dissemination arguments found in other settings. Despite the robustness of the reported results, the strategy faces implementation constraints due to (1) the relative costs associated with gathering industry-adjusted data and (2) the frictions and costs associated with capitalizing on expected price declines over a long horizon. Finally, the relative benefits of contextual analysis need to be assessed against the predictive benefits accruing to traditional financial statement analysis-based investment techniques.