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Risk or Mispricing? From the Mouths of Professionals

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  • Robert Bloomfield
  • Roni Michaely

Abstract

This article uses two experiments to assess whether security characteristics are associated with returns because investors believe they affect risk, or because investors believe they reflect mispricing. We examine how beta, market-to-book ratios, and firm size affect the returns Wall Street professionals expect, and how those factors affect perceived risk and mispricing. Consistent with traditional asset pricing models, professionals expect firms with higher betas to be riskier investments and to generate higher returns. Consistent with behavioral models, professionals expect firms with higher market-to-book ratios to be overpriced (and riskier). Professionals expect large firms to be less risky, but most do not view firm size to be a sign of mispricing.

Suggested Citation

  • Robert Bloomfield & Roni Michaely, 2004. "Risk or Mispricing? From the Mouths of Professionals," Financial Management, Financial Management Association, vol. 33(3), Fall.
    • Handle: RePEc:fma:fmanag:bloomfieldmichaely04
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    Cited by:

    1. Chi, Jianxin (Daniel) & Gupta, Manu, 2009. "Overvaluation and earnings management," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1652-1663, September.
    2. Florian Meier, 2020. "The Age of Cheap Money and Passive Investing: Are Pro Forma Earnings Value Relevant?," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 9(2), pages 1-1.
    3. Merkle, Christoph & Sextroh, Christoph J., 2021. "Value and momentum from investors’ perspective: Evidence from professionals’ risk-ratings," Journal of Empirical Finance, Elsevier, vol. 62(C), pages 159-178.
    4. Rashid Ameer, 2007. "Time‐varying Cost of Equity Capital in Southeast Asian Countries," Asian Economic Journal, East Asian Economic Association, vol. 21(2), pages 207-238, June.
    5. Turan G. Bali & Nusret Cakici & Yi Tang, 2009. "The Conditional Beta and the Cross‐Section of Expected Returns," Financial Management, Financial Management Association International, vol. 38(1), pages 103-137, March.
    6. W. Brooke Elliott & Susan D. Krische & Mark E. Peecher, 2010. "Expected Mispricing: The Joint Influence of Accounting Transparency and Investor Base," Journal of Accounting Research, Wiley Blackwell, vol. 48(2), pages 343-381, May.
    7. Markku Kaustia & Eeva Alho & Vesa Puttonen, 2008. "How Much Does Expertise Reduce Behavioral Biases? The Case of Anchoring Effects in Stock Return Estimates," Financial Management, Financial Management Association International, vol. 37(3), pages 391-412, September.
    8. Daphne Lui & Stanimir Markov & Ane Tamayo, 2007. "What Makes a Stock Risky? Evidence from Sell‐Side Analysts' Risk Ratings," Journal of Accounting Research, Wiley Blackwell, vol. 45(3), pages 629-665, June.

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