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Suppressed Negative Information and Future Underperformance

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  • Anna Scherbina
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    Abstract

    I present evidence of inefficient information processing in equity markets by documenting that negative information withheld by securities analysts is incorporated in stock prices with a significant delay. I estimate the extent of the withheld negative information based on the proportion of analysts who stop revising their annual earnings forecasts. This measure predicts negative earnings surprises and negative price reaction around earnings announcements. It could also be used to generate profitable trading strategies. I show that institutions tend to sell their stock holdings as my measure of unreported negative news increases, thus ameliorating the mispricing. Copyright 2008, Oxford University Press.

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    File URL: http://hdl.handle.net/10.1093/rof/rfm028
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    Bibliographic Info

    Article provided by European Finance Association in its journal Review of Finance.

    Volume (Year): 12 (2008)
    Issue (Month): 3 ()
    Pages: 533-565

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    Handle: RePEc:oup:revfin:v:12:y:2008:i:3:p:533-565

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    Cited by:
    1. Anna Scherbina, 2013. "Asset Price Bubbles," IMF Working Papers 13/45, International Monetary Fund.
    2. Berkman, Henk & Dimitrov, Valentin & Jain, Prem C. & Koch, Paul D. & Tice, Sheri, 2009. "Sell on the news: Differences of opinion, short-sales constraints, and returns around earnings announcements," Journal of Financial Economics, Elsevier, vol. 92(3), pages 376-399, June.
    3. Edoardo Gaffeo, 2013. "Using information markets in grantmaking. An assessment of the issues involved and an application to Italian banking foundations," DEM Discussion Papers 2013/08, Department of Economics and Management.
    4. Kelly, Bryan & Ljungqvist, Alexander P., 2009. "Testing Asymmetric-Information Asset Pricing Models," CEPR Discussion Papers 7180, C.E.P.R. Discussion Papers.

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