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

Joseph D. Piotroski

Stanford Graduate School of Business

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: May 9, 2012

Abstract

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

Piotroski, Joseph D. and So, Eric C., Identifying Expectation Errors in Value/Glamour Strategies: A Fundamental Analysis Approach (May 9, 2012). Review of Financial Studies (RFS), 25(9): 2841-2875 . Available at SSRN: https://ssrn.com/abstract=1757025 or http://dx.doi.org/10.2139/ssrn.1757025

Joseph D. Piotroski

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Eric C. So (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States

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