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Investor Reaction to Corporate Event Announcements: Underreaction or Overreaction?


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  • Padmaja Kadiyala

    (Purdue University)


Two conflicting behavioral models, underreaction and overreaction, have been proposed to explain long-run abnormal returns following a variety of corporate events. We test hypotheses that distinguish between these two models. We find that across four different corporate events, long-run abnormal returns exhibit a pattern that is most consistent with investor underreaction to short-term information available prior to the event and to the information conveyed by the event itself. The pattern in long-run abnormal returns is inconsistent with the overreaction model as well as with a model that postulates investor underreaction to short-term information and overreaction to long-term trends.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 77 (2004)
Issue (Month): 2 (April)
Pages: 357-386

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Handle: RePEc:ucp:jnlbus:v:77:y:2004:i:2:p:357-386

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Cited by:
  1. Mehdian, Seyed & Nas, Tevfik & Perry, Mark J., 2008. "An examination of investor reaction to unexpected political and economic events in Turkey," Global Finance Journal, Elsevier, vol. 18(3), pages 337-350.
  2. Samaniego Alcántar Ángel & Trejo Pech Carlos Omar & Mongrut Samuel & Fuenzalida Darcy, 2012. "Comportamiento del inversionista a diferentes niveles de inversión en I+D," Contaduría y Administración:Revista Internacional, Accounting and Management: International Journal, vol. 57(3), pages 97-114, julio-sep.
  3. Nguyen, Pascal, 2005. "Market underreaction and predictability in the cross-section of Japanese stock returns," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 15(3), pages 193-210, July.
  4. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, Elsevier, vol. 24(1), pages 34-75.
  5. Jeetendra Dangol, 2008. "Unanticipated Political Events and Stock Returns: An Event Study," NRB Economic Review, Nepal Rastra Bank, Research Department, Nepal Rastra Bank, Research Department, vol. 20, pages 86-110, April.
  6. Perotti, Pietro & Rindi, Barbara, 2010. "Market makers as information providers: The natural experiment of STAR," Journal of Empirical Finance, Elsevier, Elsevier, vol. 17(5), pages 895-917, December.
  7. G. Geoffrey Booth & Juha-Pekka Kallunki & Petri Sahlström & Jaakko Tyynelä, 2011. "Foreign vs domestic investors and the post-announcement drift," International Journal of Managerial Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 7(3), pages 220-237, June.
  8. Cohen, Lauren & Lou, Dong, 2012. "Complicated firms," Journal of Financial Economics, Elsevier, Elsevier, vol. 104(2), pages 383-400.
  9. Lauren Cohen & Dong Lou, 2011. "Complicated Firms," FMG Discussion Papers, Financial Markets Group dp683, Financial Markets Group.


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