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Limits to arbitrage and returns to value investing

Author

Listed:
  • Alexsandro Broedel Lopes

    (Universidade de São Paulo and Manchester Business School)

  • Fernando Caio Galdi

    (Fucape Business School)

Abstract

We investigate the role played by limits to arbitrage (Shleifer, 2000; Shleifer and Vishny, 1997) on the abnormal returns earned by accounting-based fundamental analysis reported by the literature in the US markets (Piotroski, 2000; Monharam, 2005). We hypothesize that if limitations on the actions of arbitrageurs are partially responsible for these reported results, abnormal returns will be even higher in markets where such limitations are more impounding. Using Brazil as a laboratory and directly controlling for limitations to arbitrage our results confirm this hypothesis and show that firms with strong fundamentals only generate abnormal returns if there are restrictions to trade on their stocks.

Suggested Citation

  • Alexsandro Broedel Lopes & Fernando Caio Galdi, 2008. "Limits to arbitrage and returns to value investing," Fucape Working Papers 10, Fucape Business School.
    • Handle: RePEc:bbz:fcpwps:10
    as

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    File URL: http://www.fucape.br/_public/workingpapers/10-2008.pdf
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    References listed on IDEAS

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    1. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    2. Alberto Chong & Florencio Lopez-de-Silanes, 2007. "Corporate Governance in Latin America," Research Department Publications 4494, Inter-American Development Bank, Research Department.
    3. Jeffrey Wurgler & Ekaterina Zhuravskaya, 2002. "Does Arbitrage Flatten Demand Curves for Stocks?," The Journal of Business, University of Chicago Press, vol. 75(4), pages 583-608, October.
    4. Alberto Chong & Florencio Lopez-de-Silanes, 2007. "Corporate Governance in Latin America," Research Department Publications 4494, Inter-American Development Bank, Research Department.
    5. da Costa, Newton Jr., 1994. "Overreaction in the Brazilian stock market," Journal of Banking & Finance, Elsevier, vol. 18(4), pages 633-642, September.
    6. van der Hart, Jaap & Slagter, Erica & van Dijk, Dick, 2003. "Stock selection strategies in emerging markets," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 105-132, February.
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    Keywords

    Arbitrage; Abnormal returns;

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