The Importance of Accounting Information in Portfolio Optimization

We study the economic importance of accounting information as defined by the value that a sophisticated investor can extract from publicly available financial statements when optimizing a portfolio of U.S. equities. Our approach applies the elegant new parametric portfolio policy method of Brandt, S...

Full description

Saved in:
Bibliographic Details
Published inJournal of accounting, auditing & finance Vol. 26; no. 1; pp. 1 - 34
Main Authors Hand, John R. M., Green, Jeremiah
Format Journal Article
LanguageEnglish
Published Los Angeles, CA SAGE Publications 01.01.2011
Warren Gorham Lamont
Subjects
Accounting
Financial statements
Optimization
Portfolio management
United States > US
Portfolio Optimization
Accounting Trading Strategies
Online AccessGet full text

Cover

More Information
Summary:We study the economic importance of accounting information as defined by the value that a sophisticated investor can extract from publicly available financial statements when optimizing a portfolio of U.S. equities. Our approach applies the elegant new parametric portfolio policy method of Brandt, Santa-Clara, and Valkanov (2009) to three simple and firm-specific annual accounting characteristics-accruals, change in earnings, and asset growth. We find that the set of optimal portfolio weights generated by accounting characteristics yield an out-of-sample, pre-transact ions-costs annual information ratio of 1.9 as compared to 1.5 for the standard price-based characteristics of firm size, book-to-market, and momentum. We also find that the delevered hedge portion of the accounting-based optimal portfolio was especially valuable during the severe bear market of 2008 because unlike many hedge finds it delivered a hedged return in 2008 of 12 percent versus only 3 percent for price-based strategies and −38 percent for the value-weighted market.
ISSN:0148-558X
2160-4061
DOI:10.1177/0148558X11400577