(3) Ou and Penman’s fundamental hypothesis, that the market underutilizes the
earnings implications of publicly-available information contained in firms’
financial statements (such as debt/equity ratios, dividend changes, gross
margins on sales, working capital ratios, and inventory changes), seems
implausible in this context. None of this information can reasonably be
viewed as obscure: it is routine accounting information. It seems unlikely to
be the type of information that would routinely (i.e., for at least the duration
of Ou and Penman’s sample period) escape the attention of the market fir
years into thefiture. Nor does it seem consistent with pure profits of such
a large magnitude.