This strategy calls for buying value stocks and selling glamour stocks. The value stocks are under-priced stocks relative to their intrinsic value indicators such as book value, earnings, cash flows, growth rate, while glamour stocks are over-price stocks relative to their intrinsic value indicators (E.g., Lakonishok et al., 1994).
Various hypotheses have been proposed to explain why the return differential between value stocks and glamour stocks persists so long.
(1994) argue that the return differential is caused by investors' naive extrapolation of the past sales or earnings growth of a firm into the future: some investors tend to get overly excited about stocks doing very well in the past, usually glamour stocks, and buy them up, while they oversell stocks doing very bad in the past, usually value stocks.
In the light of the above empirical evidence, there is a significant difference of average annual return and announcement return between high book-to-market (value stock) and low book-to-market (glamour stock
If the reader views the traditionally used C/P measure, and not the expanded CFO/P measure introduced here, as the definitive value-glamour variable, then our evidence does not support Beaver's (2002) conjecture that the accruals anomaly is the glamour stock phenomenon in disguise.
Alternatively, if the reader views the value-glamour anomaly broadly as the fundamentals-to-price anomaly (consistent with LSV 1994, 1541) and is therefore willing to interpret CFO/P as an expanded value-glamour proxy, then one would conclude that the accruals anomaly is indeed the expanded glamour stock phenomenon in disguise.
If one is willing to view CFO/P as an expanded value-glamour proxy, then one would conclude that Beaver's (2002) conjecture is valid and the accruals anomaly is the glamour stock in disguise.
One such series of studies [Fama and French (1992, 1993, 1996), Lakonishok, Shleifer, and Vishny (1994), Chan, Jegadeesh, and Lakonishok (1995), La Porta, kakonishok, Shleifer, and Vishny (1997), Kothari and Shanken (1997), Arshanapalli, Coggin, and Doukas (1998), Pontiff and Schall (1998), Doukas, Kim, and Pantzalis (2002) and Zhang (2005)] has focused upon explanations for the premium earned by high book-to-market value stocks relative to glamour stocks. The interpretation of, and explanations for, why value-strategies outperform growth-strategies remain unsettled.
(3) While not disputing the conclusion, Lakonishok, Shleifer, and Vishny (1994) attribute the superior returns of value strategies to a consistent overestimation by investors of future growth rates of glamour stocks relative to value stocks.
Lakonishok, "'Evaluating the Performance of Value versus Glamour Stocks: The Impact of Selection Bias," Journal of Financial Economics, 38, no.
Growth stocks are not merely "glamour stocks
" whose systematic risks are driven purely by investor sentiment.
In contrast, if the market overreacts to the past performance of value and growth stocks, then it should be disappointed by the earnings of glamour stocks
when they are announced, and pleasantly surprised by the earnings of value stocks.