Anomalous Price Behavior Following Earnings Surprises: Does Representativeness Cause Overreaction?
AbstractBehavioral Finance aims to explain empirical anomalies by introducing investor psychology as a determinant of asset pricing. This study provides strong evidence that anomalous stock price behavior following earnings announcements is due to a representativeness bias. It investigates current and past earnings surprises and subsequent market reaction for listed US companies over the period 1983-1999. The results suggest that investors overreact to past earnings surprises. As, on average, extreme past surprises are not confirmed by actual earnings figures, they are followed by stock market reactions of the opposite sign. Moreover, the longer the similar earnings surprise series, the higher the subsequent reversal.
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Bibliographic InfoPaper provided by Montpellier University, Center for Research in Finance in its series Working Paper Series with number 2005-1.
Date of creation: 21 Apr 2005
Date of revision:
Behavioral finance; overreaction; representativeness bias; earnings announcements;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-01-24 (All new papers)
- NEP-FIN-2006-01-24 (Finance)
- NEP-FMK-2006-01-24 (Financial Markets)
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