Joseph Piotroski, the little-known guru who authored an influential paper on how accounting-based financial analysis can lead to big stock market returns, has written a new paper looking at why value and “glamour” stocks tend to perform differently. (A tip of the cap to The Stingy Investor for highlighting this.)

The paper, entitled “Identifying Expectation Errors in Value/Glamour Strategies: A Fundamental Analysis Approach”, was co-authored with Eric C. So, also of the Stanford University Graduate School of Business. It examines whether value and glamour stocks behave differently because of risk, or because of inaccurate expectations of investors.

Among Piotroski and So’s main findings: “The value/glamour effect is an artifact of predictable expectation errors correlated with past financial data.  Although alternative explanations for these patterns could exist, the observed return patterns are consistent with systematic expectations errors embedded in prices, and cast considerable doubt on solely risk-based explanations for the value/glamour effect.” They also find that financial statement analysis is best used to identify future losers among glamour stocks, and future winners among value stocks.

The full paper is available by following this link.