(1)
(2)
Ou and Penman use several independent variables (ROA, ROE, debt/equity
ratio, dividend payout, gross margin ratio) that individually seem likely to
proxy for expected returns. They also use several differenced variables
(change in inventories, change in debt/equity ratio, change in ROE, growth
in total assets) that individually seem likely to proxy for change in expected
returns, thus increasing the difficulty of controlling for post-announcement
differences in expected returns on the long- and short-position stocks.28
When a combination of 16 or 18 such variables is selected from a set of 68.
their combined potential to proxy for expected returns and changes in
expected returns is magnified.