Investor overreaction in international stock markets -: Value stocks outperform outside the U.S.

Many studies have found that value stocks outperform growth stocks in the U.S. and other international stock markets. Little research has been published that attempts to explain this difference in performance in international markets. The results reported in this article an based on tests of several hypotheses for over 10,000 stock returns in a ten-year period for twenty-one international stock markets. The authors find evidence that investors overreact by driving the prices of growth stocks too high and the prices of value stocks too low. It appears that investors and research analysts tend to assume that past growth rates in earnings per share will continue in the future. Yet evidence shows that extreme past growth rates tend to revert to a normal mean. Consequently, when earnings disappointments are reported, stocks previously considered to be growth stocks tend to produce lower returns than value stocks.