High book-to-market (B-to-M) firms tend to be in poor financial health, as reflected by their low stock prices and poor earnings performance. Yet research consistently shows that a portfolio of these “value” firms outperforms both the overall market and portfolios comprised of low B-to-M “glamour” firms.
The reason for this is because a small number of high B-to-M firms are strong enough to raise the portfolio’s mean performance, compensating for the many high B-to-M firms that under-perform the market. Wouldn’t it be great to have a way to distinguish prospective winners from likely losers? A University of Chicago Graduate School of Business professor thought so, too.
Author: Joseph D. Piotroski
Source: Capital Ideas
Subjects: Accounting, Finance