Investor Uncertainty and the Superior Performance of Value Stocks

38 Pages Posted: 2 Mar 2003

See all articles by John A. Doukas

John A. Doukas

Old Dominion University - Strome College of Business

Chansog (Francis) Kim

The State University of New York at Stony Brook

Christos Pantzalis

University of South Florida

Date Written: September 12, 2002

Abstract

Several empirical studies show that investment strategies that favor the purchase of stocks with low prices relative to dividends, earnings, book values or other measures of value yield higher returns. Some of these studies imply that investors are too optimistic about (glamour) stocks that have had good performance in the recent past and too pessimistic about (value) stocks had had performed poorly. Others argue that value strategies are fundamentally riskier. In this paper we examine whether value stocks are riskier than glamour stocks over the 1976-1998 period. Consistent with Fama and French (1992, 1996), our findings suggest that the return advantage of value strategies reflects compensation for bearing risk. We find this risk to be associated with investor uncertainly, manifested in security analysts' divergence of opinion about the future growth in earnings of value stocks. Multifactor asset pricing tests show that investor uncertainty risk is important in explaining the superior return of value stocks. The results also suggest that the uncertainty risk factor is a state variable that predicts economic growth.

Suggested Citation

Doukas, John A. and Kim, Chansog (Francis) and Pantzalis, Christos, Investor Uncertainty and the Superior Performance of Value Stocks (September 12, 2002). Available at SSRN: https://ssrn.com/abstract=384641 or http://dx.doi.org/10.2139/ssrn.384641

John A. Doukas (Contact Author)

Old Dominion University - Strome College of Business ( email )

2080 Constant Hall
Suite 2080
Norfolk, VA 23529-0222
United States
757-683-5521 (Phone)

HOME PAGE: http://www.efmaefm.org/0DOUKAS/doukas.php

Chansog (Francis) Kim

The State University of New York at Stony Brook ( email )

College of Business
Stony Brook, NY 11794
United States
5163040037 (Phone)
631-632-9412 (Fax)

Christos Pantzalis

University of South Florida ( email )

Tampa, FL 33620-5500
United States
(813) 974-3262 (Phone)

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