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Information Uncertainty and Stock Returns

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  • X. FRANK ZHANG

Abstract

There is substantial evidence of short-term stock price continuation, which the prior literature often attributes to investor behavioral biases such as underreaction to new information. This paper investigates the role of information uncertainty in price continuation anomalies and cross-sectional variations in stock returns. If short-term price continuation is due to investor behavioral biases, we should observe greater price drift when there is greater information uncertainty. As a result, greater information uncertainty should produce relatively higher expected returns following good news and relatively lower expected returns following bad news. My evidence supports this hypothesis. Copyright 2006 by The American Finance Association.

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  • X. Frank Zhang, 2006. "Information Uncertainty and Stock Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 105-137, February.
  • Handle: RePEc:bla:jfinan:v:61:y:2006:i:1:p:105-137
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