Separating Winners from Losers among Low Book-to-Market Stocks using Financial Statement Analysis

How value–glamour investors use financial information: UK evidence of investors’ confirmation bias

“…Piotroski (2000) shows that, among value stocks, a hedge portfolio with a long position in financially strong stocks and short in weak stocks earns on average returns of 23% per annum, and these strong returns result mainly from the long position in financially strong stocks (13.4%). On the contrary, among glamour stocks, Mohanram (2005) shows that the contribution of a short position in financially weak stocks to the annual returns on the hedge portfolio dominates (17.9% out of 21.2%). Those observations suggest that, among value (glamour) stocks, those that are financially stronger (weaker) are more severely mispriced.…”

“…Piotroski finds that, among high BM value stocks in the US during the period between 1976 and 1996, those with higher F Score tend to outperform their lower F Score counterparts by as much as 23% per year, and such outperformance persists for at least two years after the financial statements are released. In a similar vein, Mohanram (2005 ) designs a G Score from eight fundamental signals and finds that this measure of financial strength can differentiate winners from losers among low BM glamour stocks in the US stock market during the 1979-1999 period. Subsequently, Bird and Casavecchia (2007) use a dynamic model based on 24 accounting variables to predict the probability of a stock having an improved earnings-per-share performance, and they employ that probability as a measure of financial strength.…”

“…Most of the research in this area (Piotroski, 2000;Mohanram, 2005;Bird and Casavecchia, 2007) defines excess returns against a benchmark, such as the market portfolio or the corresponding size deciles. Bird and Casavecchia (2007) also find evidence that the Fama and French three-factor model cannot explain the observed returns.…”

“…In addition, bootstrap procedures are also employed to reinforce the evidence obtained from the traditional parametric tests. Second, because existing studies on contextual fundamental analysis (Piotroski, 2000;Mohanram, 2005) restrict their investigation to samples of either value or glamour stocks, a test of the models' performance across both value and glamour contexts provides a better platform to explain the patterns of returns.…”

How Value–Glamour Investors Use Financial Information: UK Evidence of Investor’s Confirmation Bias

“…For example, Piotroski (2000 ) uses the value-weighted market portfolio and Mohanram (2005) uses size deciles as benchmark. However, it is well documented that using referencing portfolios can make the test statistics severely misspecified, and that the null hypothesis is rejected more often than the theoretical rejection rates would suggest (Barber and Lyon, 1997;Kothari and Warner, 1997).…”