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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
Date of revision:
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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References

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  18. Hirshleifer, David & Teoh, Siew Hong, 2003. "Limited attention, information disclosure, and financial reporting," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 337-386, December.
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  22. MING DONG & David Hirshleifer & SCOTT RICHARSON & Siew Hong Teoh, 2004. "Does Investor Misvaluation Drive the Takeover Market?," Finance 0412002, EconWPA.
  23. 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.
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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.

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