Global Market Inefficiencies Söhnke M. Bartram Mark Grinblatt

Profits from Fundamental Analysis: Used to Assess Relative Efficiency Strategy Based on Fundamental Analysis Profits from Buying Undervalued Stocks Selling Overvalued Stocks Deviations of Market Prices from Fair Value More Likely to Converge than Diverge Fair Value Estimation Requirement Problem: How to Do It Research Problem: Data Snooping Bartram and Grinblatt (April 2018, JFE) Agnostic mispricing signal: Linear f(Accounting)

Fair Value Estimation Within Country Peer Implied Valuation Regression Market capitalization on accounting values and intercept Residual as a percent of market cap is mispricing Market portfolio is fairly valued by construction Market capitalization on accounting values without intercept Firms with accounting values of zero have no value Results independent of scale (per share, % of assets) Market capitalization on earnings forecast for FY1 and FY2 Two Econometric Approaches Ordinary Least Squares (OLS) Theil(1950)-Sen(1968) (TS) Ohlson and Kim (2015) argue that TS estimation is superior to OLS for linear valuation models

Testing Efficiency with Trading Profits: Regressions Globally and By Regions Cross sectional Fama-MacBeth regressions of firm’s returns on mispricing quinitle dummies (Q5=underpriced, Q1=overpriced) Controls for usual suspects: beta, size, book/market, past returns (short, medium, long), accruals, SUE, gross profitability, earnings yield, industry, country fixed effects Factor model alphas: quintile-sorted mispricing portfolios 80-factor model from our stocks 44-factor model from everything in French Data Library Tests between Emerging and Developed Markets Effect of a Delayed Signal Profits net of transaction costs/Buy-and-Hold strategy Profits within quintiles of 20 other anomalies Testing whether frictions predict trading profits

Sample and Data Sample DataStream WorldScope PIT Fundamentals 25,731 non-financial firms from 36 countries 4/1993 - 9/2016 DataStream Returns and market capitalization WorldScope PIT Fundamentals Balance sheet, income statement and cash flow statement French Data Library U.S. and international factors (global 44-factor model) Elkins McSherry Fees, commissions, and market impact Country attributes from assorted sources

Sample By Country

Sample by Region Regions World, World (ex U.S.) Geographic: Asia Pacific, Europe, Americas, U.S., Japan Emerging, Developed, Developed (ex. U.S.)

Selected Summary Statistics These figures are large because extreme conditional means sort on sampling error and are therefore biased. However, since much of our later analysis involves ranks, there is little need to adjust for the bias with statistical corrections like Bayesian shrinkage. By construction, the date t market-cap-weighted average of Mj(t) is zero.

Q5-Q1 Monthly Return Spreads

Fama-MacBeth Regression Coeffs: World (non-Q5 regressors hidden)

Fama-MacBeth Regression: Q5 dummy coefficient by region

Emerging vs Developed Fama-MacBeth Regression (most coefficients hidden)

Monthly 80-Factor Alpha Spreads

EW 80-Factor Model Intercepts: Alphas Across Quintiles and Regions

Delay and Signal Efficacy

Turnover and Transactions Costs

Transaction Costs and Frictions: Firm-Level Fama MacBeth Regressions

Controlling For Other Anomalies

Signals Without Intercept

Signals With Earnings Forecasts For firms that have data on both types of signals, the alpha spreads are about same as those deriving from the accounting variables alone

Summary and Conclusion Study Equity Market Efficiency Internationally Mispricing predicts risk-adjusted returns around the world Inefficiencies are larger in Asia Pacific (including Japan) Emerging markets compared to developed markets Positive relation of gross alpha and transactions costs Alpha from mispricing in hypothetical country with zero trading costs is zero Trading profits exist after transactions costs Reducing turnover increases net profits in emerging markets Other costs (e.g. compliance) or opportunity costs of organizational effort and capital deter arbitrageurs information acquisition/processing, legal compliance