Anomalous Price Behavior Following Earnings Surprises: Does Representativeness Cause Overreaction?

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Anomalous Price Behavior Following Earnings Surprises: Does Representativeness Cause Overreaction?

Author Info

Michael Kaestner (GESEM, Center for Research in Finance, Montpellier University, France)

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Michael Kaestner

Abstract

Behavioral 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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Paper provided by EconWPA in its series Finance with number 0505018.

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Length: 17 pages
Date of creation: 22 May 2005
Date of revision: 03 Oct 2005
Handle: RePEc:wpa:wuwpfi:0505018

Note: Type of Document - pdf; pages: 17
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Paper
- Kaestner, Michael, 2005. "Anomalous Price Behavior Following Earnings Surprises: Does Representativeness Cause Overreaction?," Working Paper Series 2005-1, Montpellier University, Center for Research in Finance. [Downloadable!]

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-05-29 (All new papers)
NEP-RMG-2005-05-29 (Risk Management)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Lee, Inmoo, 1997. " Do Firms Knowingly Sell Overvalued Equity?," Journal of Finance, American Finance Association, vol. 52(4), pages 1439-66, September. [Downloadable!] (restricted)
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Other versions:
- Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment1," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September. [Downloadable!] (restricted)
Harrison Hong & Jeremy C. Stein, 1997. "A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets," NBER Working Papers 6324, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Other versions:
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David M. Cutler & James M. Poterba & Lawrence H. Summers, 1990. "Speculative Dynamics," NBER Working Papers 3242, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Culter, D.M. & Poterba, J.M. & Summers, L.H., 1990. "Speculative Dynamics," Working papers 544, Massachusetts Institute of Technology (MIT), Department of Economics.
- Cutler, David M & Poterba, James M & Summers, Lawrence H, 1991. "Speculative Dynamics," Review of Economic Studies, Blackwell Publishing, vol. 58(3), pages 529-46, May. [Downloadable!] (restricted)
De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July. [Downloadable!] (restricted)
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