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Limited Investor Attention and Stock Market Misreactions to Accounting Information

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  • Hirshleifer, David

    (Ohio State U)

  • Teoh, Siew Hong

Abstract

We provide a model in which a single psychological constraint, limited investor attention, explains both under- and over-reaction to different earnings components. Investor neglect of information in current-period earnings about future earnings induces postearnings announcement drift, the strength of which is increasing with the persistence of earnings. Neglect of earnings components causes accruals and cash flows to predict abnormal returns. We derive new untested empirical implications relating the strength of the drift, accruals, and cash flow anomalies to the quality of earnings, to the number of distracting events, and to the volatilities of and correlation between accruals and cash flows.

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File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2005/2005-24.pdf
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Bibliographic Info

Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2005-24.

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Date of creation: Nov 2005
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Handle: RePEc:ecl:ohidic:2005-24

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Web page: http://www.cob.ohio-state.edu/fin/dice/list.htm
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  1. MING DONG & David Hirshleifer & SCOTT RICHARSON & Siew Hong Teoh, 2004. "Does Investor Misvaluation Drive the Takeover Market?," Finance 0412002, EconWPA.
  2. Michael S. Rashes, 2001. "Massively Confused Investors Making Conspicuously Ignorant Choices (MCI-MCIC)," Journal of Finance, American Finance Association, vol. 56(5), pages 1911-1927, October.
  3. Siew Hong Teoh & Ivo Welch & T.J. Wong, 1998. "Earnings Management and the Long-Run Market Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 53(6), pages 1935-1974, December.
  4. Hong, Harrison & Torous, Walter & Valkanov, Rossen, 2007. "Do industries lead stock markets?," Journal of Financial Economics, Elsevier, vol. 83(2), pages 367-396, February.
  5. Hirshleifer, David & Kewei Hou & Teoh, Siew Hong & Yinglei Zhang, 2004. "Do investors overvalue firms with bloated balance sheets?," Journal of Accounting and Economics, Elsevier, vol. 38(1), pages 297-331, December.
  6. Trueman, Brett, 1994. "Analyst Forecasts and Herding Behavior," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 97-124.
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  8. Hirshleifer, David & Lim, Seongyeon & Teoh, Siew Hong, 2004. "Disclosure to an Audience with Limited Attention," Working Paper Series 2004-21, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  9. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, 08.
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  12. Siew Hong Teoh & T. J. Wong, 2002. "Why New Issues and High-Accrual Firms Underperform: The Role of Analysts' Credulity," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 869-900.
  13. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
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  21. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
  22. Grinblatt, Mark & Keloharju, Matti, 2000. "The investment behavior and performance of various investor types: a study of Finland's unique data set," Journal of Financial Economics, Elsevier, vol. 55(1), pages 43-67, January.
  23. Libby, Robert & Bloomfield, Robert & Nelson, Mark W., 2002. "Experimental research in financial accounting," Accounting, Organizations and Society, Elsevier, vol. 27(8), pages 775-810, November.
  24. Teoh, Siew Hong & Welch, Ivo & Wong, T. J., 1998. "Earnings management and the underperformance of seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 50(1), pages 63-99, October.
  25. Abarbanell, Jeffrey S & Bernard, Victor L, 1992. " Tests of Analysts' Overreaction/Underreaction to Earnings Information as an Explanation for Anomalous Stock Price Behavior," Journal of Finance, American Finance Association, vol. 47(3), pages 1181-207, July.
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Cited by:
  1. Loh, Roger, 2008. "Investor Attention and the Underreaction to Stock Recommendations," Working Paper Series 2008-2, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. David Hirshleifer & Sonya Seongyeon Lim & Siew Hong Teoh, 2009. "Driven to Distraction: Extraneous Events and Underreaction to Earnings News," Journal of Finance, American Finance Association, vol. 64(5), pages 2289-2325, October.

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