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Dissecting value-growth strategies conditioned on expectation errors

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  • MEMIS, HALIL I.
  • WESSELS, ULRICH

Abstract

We examine the previously documented effect between a firm’s FSCORE and book-to-market ratio proposed by Piotroski and So (2012) and analyze the authors’ expectation errors hypothesis from a present value perspective. We find a strong value premium which is concentrated among firms where book-to-market implied expectations are incongruent with underlying fundamental strength. Using the decomposition of variation in book-to-market ratios motivated by Cohen et al. (2003), we show that the observed effect between a firm’s FSCORE and book-to-market ratio is attributable to mispricing as the variation is mostly due to variation in expected returns rather than variation in expected profitability.

Suggested Citation

  • Memis, Halil I. & Wessels, Ulrich, 2024. "Dissecting value-growth strategies conditioned on expectation errors," The Quarterly Review of Economics and Finance, Elsevier, vol. 93(C), pages 155-163.
    • Handle: RePEc:eee:quaeco:v:93:y:2024:i:c:p:155-163
    DOI: 10.1016/j.qref.2023.11.009
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    Keywords

    Value; Mispricing; Decomposition; Stock returns; International markets;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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