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An Empirical Evaluation of Behavioral Models Based on Decompositions of Stock Prices

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  • Bong-Soo Lee

    (College of Business, Florida State University)

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    Abstract

    Several behavioral models have been proposed to explain the observed short-horizon continuation and long-horizon reversals in returns. We employ a time-series framework of identifying tangible and intangible information based on two valuation models: the conventional dividend discount model and the residual income model. We find investors overreact to intangible information but underreact initially to tangible information, with no significant reversal associated with tangible information in the long run. Our finding is compatible with models incorporating investors' overconfidence in their private information. We also find that the residual income model provides a better valuation than the dividend discount model.

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    Bibliographic Info

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

    Volume (Year): 79 (2006)
    Issue (Month): 1 (January)
    Pages: 393-428

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    Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:1:p:393-428

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Tswei, Keshin, 2013. "Is transaction price more value relevant compared to accounting information? An investigation of a time-series approach," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 1062-1078.
    2. Chuang, Wen-I & Lee, Bong-Soo, 2006. "An empirical evaluation of the overconfidence hypothesis," Journal of Banking & Finance, Elsevier, vol. 30(9), pages 2489-2515, September.

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