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Good News for Value Stocks: Further Evidence on Market Efficiency

Authors

  • RAFAEL LA PORTA,

  • JOSEF LAKONISHOK,

  • ANDREI SHLEIFER,

  • ROBERT VISHNY

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    • La Porta is from Harvard University, Lakonishok is from the University of Illinois, Shleifer is from Harvard University, and Vishny is from the University of Chicago. We thank Gene Fama, Steve Kaplan, and an anonymous referee for helpful comments. Financial support was provided by the National Science Foundation, the Bradley Foundation, and the National Bureau of Economic Research Asset Management Research Advisory Group.

ABSTRACT

This article examines the hypothesis that the superior return to so-called value stocks is the result of expectational errors made by investors. We study stock price reactions around earnings announcements for value and glamour stocks over a 5-year period after portfolio formation. The announcement returns suggest that a significant portion of the return difference between value and glamour stocks is attributable to earnings surprises that are systematically more positive for value stocks. The evidence is inconsistent with a risk-based explanation for the return differential.

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