Identifying Expectation Errors in Value/Glamour Strategies: A Fundamental Analysis Approach
Joseph D. Piotroski
Stanford Graduate School of Business
Eric C. So
Massachusetts Institute of Technology (MIT) - Sloan School of Management
May 9, 2012
Review of Financial Studies (RFS), 25(9): 2841-2875
It is well established that value stocks outperform glamour stocks, yet considerable debate exists about whether the return differential reflects compensation for risk or mispricing. Under mispricing explanations, prices of glamour (value) firms reflect systematically optimistic (pessimistic) expectations; thus, the value/glamour effect should be concentrated (absent) among firms with (without) ex ante identifiable expectation errors. Classifying firms based upon whether expectations implied by current pricing multiples are congruent with the strength of their fundamentals, we document that value/glamour returns and ex post revisions to market expectations are predictably concentrated (absent) among firms with ex ante biased (unbiased) market expectations.
Number of Pages in PDF File: 47
Keywords: Financial Statement Analysis, value, glamour, market efficiency, expectation errors
JEL Classification: M40, M41, G10, G11, G12, G14working papers series
Date posted: February 8, 2011 ; Last revised: October 8, 2013
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