How Value–Glamour Investors Use Financial Information: UK Evidence of Investor’s Confirmation Bias

Abstract

The paper investigates investor’s behaviour in the context of value–glamour investing and fundamental analysis, and provides a direct test of the confirmation bias by bringing together the evidence from several strands of literature into a well-defined framework of investor behaviour. The empirical evidence presented is in line with a model of investor’s asymmetric reaction to good and bad news due to confirmation bias. Pessimistic value investors typically under-react to good financial information, but they process bad information rationally or over-confidently. On the contrary, glamour investors are often too optimistic to timely update prices following bad financial information, but they are likely to fairly price or even over-react when receiving good information.

Keywords: Value–glamour investing, financial statement analysis, contextual fundamental analysis, market efficiency, behavioural finance, confirmation bias

JEL Classification: G14