Identifying Expectation Errors in Value/Glamour Strategies: A Fundamental Analysis Approach
Review of Financial Studies (RFS), 25(9): 2841-2875
47 Pages Posted: 8 Feb 2011 Last revised: 8 Oct 2013
Date Written: May 9, 2012
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.
Keywords: Financial Statement Analysis, value, glamour, market efficiency, expectation errors
JEL Classification: M40, M41, G10, G11, G12, G14
Suggested Citation: Suggested Citation