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Expectation Errors in European Value-Growth Strategies

Christian Walkshäusl

Review of Finance, 2017, vol. 21, issue 2, 845-870

Abstract: This article tests Piotroski and So’s (2012) market expectation errors approach to value-growth investing in European equity markets. As in the USA, European value-growth returns are concentrated among firms with existent market expectation errors, but absent among firms without such errors which can be ex ante identified by interacting book-to-market with FSCORE, an accounting-based measure of the firm’s fundamental strength. The returns to an expectation errors-based value-growth strategy are highly persistent for up to three years after portfolio formation, pervasive among large firms, and cannot be explained by common risk factors. However, consistent with a mispricing-based interpretation, prior external financing activities significantly influence these market expectation errors. A financing-based misvaluation factor can explain the return behavior of value-growth strategies formed along market expectations errors.

JEL-codes: G11 G12 G15 (search for similar items in EconPapers)
Date: 2017
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