1. For example, in 2003 Roman Abramovich purchased Chelsea Football Club and started managing it with a simple strategy: if you want a player, get him at any cost. The 2006 transfer of star striker Andriy Shevchenko from AC Milan to Chelsea for 30.8 million pounds was an English club record at the time. But Shevchenko was already 29 years old, and, frequently injured, he scored only 9 goals in two seasons with Chelsea.
2. The Economist (2011) wrote, “Manchester United has become one of the world’s most valuable sports businesses on [Ferguson’s] watch, and…one of the secrets of his success has been knowing the value of money.” The same article describes him as “notably meritocratic” in his hiring decisions. Anita Elberse and Tom Dye note in a Harvard case study that, over the course of his career, he adapted to meaningful changes in the world of soccer: “Ferguson had massively expanded his backroom staff, and had appointed a team of sports scientists to support the coaching staff.”
3. Novy–Marx (2013). Gross profit is the difference between sales and the costs of goods sold.
4. We did not include quality measures related to the quality of corporate governance or practitioner-oriented measures of investment quality, e.g., earnings-to-price ratios or low volatility.
5. The gross profitability measure has been critically examined by Ball, Gerakos, Linnainmaa and Nikolaev (2014).
6. A player’s on-base percentage is the proportion of at-bats for which he walked or got a hit. A player’s slugging percentage is the number of bases he ran in proportion to the number available (four bases per at-bat).
7. Cochrane (2008).
8. Chan, Karceski, and Lakonishok (2003).
9. If the market were adept at predicting cash flow growth, and if price-to-fundamentals ratios reflected the market’s forecast, then the value effect would disappear. Companies whose growth is predictable and correctly reflected in the valuation ratios would not generate any value premium.
10. By introducing the three types of information mentioned above, we are not trying to lengthen the list of quality indicators. On the contrary, we are trying to set apart the reasonably predictable information about company fundamentals that may prove useful in appraising value signals.
11. It has been argued that bankruptcy risk may be associated with a premium. However, Dichew (1998) showed that companies in distress historically did not pay a premium.
12. Sloan (1996) defines the measure as the change in non-cash current assets, less the change in current liabilities (exclusive of short-term debt and taxes payable), less depreciation expense, all divided by average total assets.
13. Piotroski (2000).
14. Piotroski and So (2013).
15. Fama and French (2013); Asness, Frazzini, and Pedersen (2014).
Asness, Cliff, Andrea Frazzini, and Lasse Heje Pedersen. 2014. “Quality Minus Junk.” Working Paper (June 19).
Ball, Ray, Joseph Gerakos, Juhani T. Linnainmaa, and Valeri V. Nikolaev. 2014. “Deflating Profitability.” Fama-Miller Working Paper; Chicago Booth Research Paper No. 14-10.
Basu, Sanjoy. 1983. “The Relationship between Earnings’ Yield, Market Value, and Return for NYSE Common Stocks: Further Evidence.” Journal of Financial Economics, vol. 12, no. 1 (June):129–156.
Chan, Louis K.C., Jason Karceski, and Josef Lakonishok. 2003. “The Level and Persistence of Growth Rates.” Journal of Finance, vol. 58, no. 2 (April):643–684.
Cochrane, John H. 2008. “The Dog That Did Not Bark: A Defense of Return Predictability.” Review of Financial Studies, vol. 21, no. 4 (July):1533–1575.
———. 2011. “Presidential Address: Discount Rates.” Journal of Finance, vol. 66, no. 4 (August):1047–1108.
Chordia, Tarun, Avanidhar Subrahmanyam, and Qing Tong. 2014. “Have Capital Market Anomalies Attenuated in the Recent Era of High Liquidity and Trading Activity?” Working Paper (May 12).
Dichew, Ilia, 1998. “Is the Risk of Bankruptcy a Systematic Risk?” Journal of Finance, vol. 53, no.3 (June):1131–1147.
Elberse, Anita, and Tom Dye. 2012. “Sir Alex Ferguson: Managing Manchester United.” Harvard Business School Case 513-051 (September).
Fama, Eugene F., and Kenneth R. French. 1992.”The Cross-Section of Expected Stock Returns.” Journal of Finance, vol. 47, no. 2 (June):427–465.
———. 2013. “A Five-Factor Asset Pricing Model.” Working Paper (May).
Haugen, Robert, and A. James Heins. 1975. “Risk and the Rate of Return on Financial Assets: Some Old Wine in New Bottles.” Journal of Financial and Quantitative Analysis, vol. 10, no. 5 (December):775–784.
Harvey, Campbell, Yan Liu, and Heqing Zhu (2014) “… and the Cross-Section of Expected Returns.” Working Paper (May 17).
Levi, Yaron, and Ivo Welch. 2014. “Long Term Capital Budgeting.” Working Paper (March 29).
Lewis, Michael. 2003. Moneyball: The Art of Winning an Unfair Game. New York and London: W.W. Norton & Company.
McLean, David R., and Jeffrey Pontiff. 2013. “Does Academic Research Destroy Stock Return Predictability?” Working Paper (May 16).
Novy-Marx, Robert. 2013. “The Other Side of Value: The Gross Profitability Premium.” Journal of Financial Economics, vol. 108, no. 1 (April):1–28.
Piotroski, Joseph D. 2000. “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers.” Journal of Accounting Research, vol. 38 (Supplement: Studies on Accounting Information and the Economics of the Firm):1–41.
Piotroski , J. D., and E. C. So. 2013. “Identifying Expectation Errors in Value/Glamour Strategies: A Fundamental Analysis Approach.” Review of Financial Studies, vol. 25, no. 9 (May):2841–2875.
Sloan, Richard G. 1996. “Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings?” The Accounting Review, vol. 71, no. 3 (July):289–315.
The Economist. 2011. “The Secrets of Sir Alex.” Written by M.B (November 8).