The determinants of the investments of Berkshire Hathaway

Abstract

Berkshire Hathaway and Warren Buffett, arguably one of the most successful investors in the world, have been the interest of many financial articles but have received relatively less attention from the academic literature. The question of what firms are likely to be selected for investment is especially one that has not been addressed. This paper examines what the determinants of the investment portfolio of Berkshire Hathaway may be from by examining the relation between stock holdings and known criteria, Abarbanell and Bushee (1997, 1998) fundamental signals, and financial statement accounts and financial information. The results point towards 2 overall explanations for stock selection, which are avoiding overvaluation and finding firms that invest more in selling activities and less in capital expenditures and research and development expenses. In detail, Berkshire Hathaway is likely to invest in a firm that shows small abnormal returns, invests less in research and development and capital expenditures, invests in selling, general, and administrative expenses, has an unqualified opinion, and has a gross margin that is smaller than the industry average. Testing the hypothesized determinants on ownership level and holding period are conducted as well and are qualitatively equivalent with the 2 overall explanations