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124 selecting securities
We have demonstrated that equity characteristics are not mere
proxies for value. The explanatory power of other equity attributes
dwarfs that of the DDM. Furthermore, the DDM appears to just be
another equity attribute and, like some attributes, may be amena
to prediction.
In an inefficient market driven by investor psychology, investment
opportunities are bountiful. Blind adherence to value models
is suboptimal, and a heavy dose of empiricism is warranted. As Noble
laureate Herbert Simon (1987') has asserted (p. 39), the emergi
laws of economic behavior "have much more the complexity of molecular
biology than the simplicity of classical mechanics. As a consequence,
they call for a very high ratio of empirical investigation to
theorybuilding." In a similar vein, Paul Samuelson (1987') has
stated (p. 6): "I prefer paradigms that combine plausible Newtonian
theories with observed Baconian facts. But never would I refuse
houseroom to a sturdy fact just because it is a bastard without a
name and a parental model.''
ENDNOTES
The authors thank The Dais Group; Interactive Data Corporation;
Institutional Brokers Estimate System (I/B/E/S); and Standard &
Poor's Compustat for data and systems support.
1. For cross-sectional effects, see Jacobs and Levy (1988~). For a briefer
treatment, see Jacobs and Levy (1988b). This evidence is more
compelling than previous market anomaly research because it
documents multiple independent rejections of efficiency. For
calendar effects, see Jacobs and Levy (1988a and 1989).
2. This valuation formula is sometimes referred to as the Gordon-
Shapiro model. It is developed in the context of a dynamic growth
model in Gordon and Shapiro (1956).
3. Sorenson and Williamson (1985) find, however, improved predictive
power for successively more complete security valuation modelincluding
P/E, constant-growth DDM (Gordon-Shapiro), two-stage
DDM, and three-stage DDM.
4. Estep (1985) argues that such attributes are incomplete estimators of
expected return, in that they ignore important parts of the full
valuation equation. Estep (1987b) asserts that returns to attributes