What is known as the effect where stocks with low price-to-book ratios outperform those with high price-to-book ratios?

The phenomenon where stocks with low price-to-book (P/B) ratios tend to outperform those with high P/B ratios is known as the P/B Ratio Effect. This effect is grounded in the value investing principle that undervalued stocks—often identified by low P/B ratios—are more likely to yield higher returns as the market corrects these perceived misvaluations over time. Investors often utilize the P/B ratio as a benchmark to assess the relative value of a company's stock, with lower figures indicating potentially greater value relative to the company's net assets. The underlying rationale is that stocks trading at lower multiples can indicate undervaluation, making them attractive investments compared to their higher P/B counterparts. This concept extends to the broader understanding of value investing strategies, where investors seek to exploit the market's tendency to overreact, leading to opportunities in stocks that are undervalued based on their fundamental worth.