The literature on accounting anomalies and fundamental analysis provides important
insights into the behavior of stock prices and the relation between accounting numbers and
firm value. My review discusses five key topics from this literature: (1) discriminating
between risk and mispricing explanations for return anomalies; (2) estimating the implied
cost of capital; (3) inferring investors’ perceptions of the earnings process; (4) understanding
the importance of trading costs and firm size; and (5) improving the construction
of characteristic-based trading strategies. My discussion highlights important challenges
facing the literature and offers suggestions for improving empirical tests.