Abstract
Understanding the connections between stock prices and fundamental value estimates yields important insights about the extent to which stock prices are shaped by fundamental accounting information. On the other hand, it also provides an assessment of the appropriateness of fundamental valuation models in estimating equity values. This book comprises three empirical research papers investigating several aspects of the association between stock prices and residual income-based fundamental values. The first paper tests whether stock prices overlap and co-move with fundamental values, using the setting of US financial services firms; a setting which is less distorted by conservative accounting principles. The second paper investigates how firm characteristics, trading costs, and macroeconomic conditions influence the size and persistence of deviations between stock prices and fundamental values. The third paper examines whether value investing strategies are more profitable when stock prices and fundamental values gravitate towards each other, whether such corrections of deviations can be predicted, and whether these predictions can be used to configure trading strategies that generate superior investment returns