Limits to Arbitrage and Value Investing: Evidence from Brazil
44 Pages Posted: 22 Mar 2008 Last revised: 29 Jan 2010
Date Written: January 28, 2009
Abstract
In this paper we show that the results obtained by accounting-based fundamental analysis strategies observed in the US market (Piotroski, 2000 and Mohanram, 2005) cannot be completed extended to other markets. Using Brazil as an experiment, standard tests show the apparent usefulness of financial statement analysis as an effective investment tool. However, additional investigation demonstrates that the significant returns generated by these strategies disappear when properly controlled by limitations on the actions of arbitrageurs. These results contribute to the literature that tries to address the impact of limits to arbitrage on some well reported capital markets phenomena related to financial reporting.
Keywords: limits to arbitrage, value investing, market efficiency, financial accounting, emerging markets
JEL Classification: G14, M41
Suggested Citation: Suggested Citation