Disagreement and the Superior Performance of Value Stocks
18 Pages Posted: 21 May 2004
Date Written: May 18, 2004
We investigate whether divergence of opinion among investors, manifested in the dispersion of analysts' earnings forecasts, plays an important role in asset pricing. Specifically, we test whether disagreement can explain the cross-sectional return difference between value and growth stocks over the 1983-2001 period. Consistent with the theoretical proposition of Williams (1977), that stocks subject to greater investor disagreement earn higher returns, we find value stocks to be exposed to greater investor disagreement than glamour stocks. Our findings suggest that the return advantage of value strategies is a reward for the greater disagreement characterizing their future growth in earnings. Alternative multifactor asset pricing tests show that investor disagreement plays an important role in explaining the superior return of value stocks.
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation