This hypothesis may appear to be inconsistent with previous findings on contrarian investment theory, suggesting that value stocks fall less after negative earnings surprises relative to glamour stock, while value stocks rise more after positive earnings surprises relative to 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.
Various hypotheses have been proposed to explain why the return differential between value stocks and glamour stocks persists so long.
Consequently, glamour stocks are overpriced while value stocks are under priced.
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.
On the other hand, investors are overly optimistic about glamour stocks and have higher expectations of future growth because these firms had strong earnings and growth in the past.
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.
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.
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.