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We find that the acceleration and deceleration patterns of historical prices are predictive of future expected returns in momentum investing in the U.S. equity market from 1962 to 2014. Winners with accelerated historical price increases deliver higher future expected returns and losers with accelerated historical price decreases perform more poorly in the future. Hence, the profit from buying past accelerated winners and shorting past accelerated losers is significantly higher than the momentum profit by 51.47%. Such profit cannot be subsumed by certain characteristics that have been considered to explain momentum. Possible explanations for our results include extrapolative bias and overreaction.

Ascertaining the value of future earnings is one of the major objectives for investors to forecast and thereby determine current stock prices. This paper examines whether predicting future earnings can create risk-adjusted returns. We find that the risk-adjusted returns of portfolios constructed on future E/P ratios are superior to those constructed on past E/P ratios under the four-factor model. The risk-adjusted returns increase monotonically with the number of future quarters used to compute the E/P ratios. Moreover, the risk-adjusted returns for the firms with high E/P ratios are positively related to the changes between past earnings and future earnings. Overall, forecasting future earnings precisely would significantly enhance the risk-adjusted returns of portfolios.

This study examines the interactions between trading strategies based on the nearness to the 52-week high, the nearness to the 52-week low, and past returns. We offer evidence that the nearness to the 52-week low has predictive power for future average returns. Our results also reveal that the nearness to the 52-week high as well as to the 52-week low and past returns each have certain exclusive unpriced information content in the cross-sectional pricing of stocks. Moreover, a trading strategy based on the nearness to the 52-week low provides an excellent hedge for the momentum strategy, thereby nearly doubling the Sharpe ratio of the momentum strategy.

Previous studies have focused on which stocks are winners or losers but have paid little attention to the formation process of past returns. This paper develops a model showing that past returns and the formation process of past returns have a joint effect on future expected returns. The empirical evidence shows that the zero-investment portfolio, including stocks with specific patterns of historical prices, improves monthly momentum profit by 59%. Overall, the process of how one stock becomes a winner or loser can further distinguish the best and worst stocks in a group of winners or losers.

As a visual mode of analysis is more intuitive to human cognition than algebraic numbers, we propose that the visual pattern of historical prices is a salient signal that attracts attention; thereby inducing overreaction. We construct a long-short portfolio, including the stocks that are more likely to grab attention, and create an illusion through their discernible visual patterns of historical prices. The newly-developed portfolio commands an annual risk-adjusted return of 23.1% and dominates momentum investing. The outperformance holds under various specifications and asset pricing models. We provide support that momentum is induced by visually psychological biases.

Value strategies purchase stocks that have high fundamental values relative to prices. The interpretation of why value strategies outperform is controversial. Based on the fact that investors may rely too heavily, or “anchor,” on one piece of information when making investment decisions, this study shows that value strategies can yield higher returns by exploiting anchoring bias, and that the risk premium is also tripled. The returns cannot be rationalized with a variety of factor models. Overall, this study confirms the predictability of stock expected returns based on fundamental values relative to prices in the context of investor behavior.

This paper investigates the interaction of government and financial institutions in the operation of a company through the relationship of the main bank system and the system of amakudari (appointing retired bureaucrats to the boards of public companies). Consistent with resource dependency theory, the empirical results suggest that governments and financial institutions tend to appoint representatives to the board in order to help troubled companies. However, a negative relationship is established between the presence of such amakudari and subsequent firm performance. Thus, while the system of amakudari may use its influence in an attempt to save troubled companies, it is possible that, contrary to resource dependency theory but consistent with agency theory, the monitoring ability of the board may consequently be jeopardized to the detriment of overall firm performance.